Tether’s US Dollar-pegged stablecoin, USDT, is rapidly losing market cap. From April 1 through May 10 of this year, USDT had a market cap around $83B. On May 11, investors started cashing out. In just a few days, Tether has lost 8% of its market cap.
Where is the money going? The market cap of Circle's USDC stablecoin has risen ~2.5B over the last few days. It's possible that USDC is capturing some of Tether's market cap as investors leave USDT. Prominent Twitter users like Daniel Wang claim they're swapping USDT to USDC and DAI.
Other Tether holders may be exiting the crypto space entirely or using their USDT to buy other cryptos, which have been selling at a discount following the Terra/UST collapse. Tether and Bitfinex, the shady exchange owned by the same group, are afraid of a bank run: Bitfinex is said to be offering 30% yields on USDT deposits.
Tether is a controversial stablecoin project; its detractors distrust the company due to its lack of transparency regarding what assets it uses to back USDT. According to Tether, every USDT token is backed 1:1 by something, but Tether is believed to be holding high-risk debt, such as Chinese commercial paper, in its treasury. The Chinese real estate debt crisis has increased the anxiety surrounding these suspected holdings.
Tether's collapse has also been predicted many times. Bitfinex'ed has been calling out Tether's shady activity since 2017–including accusing Tether of controlling the price of Bitcoin, printing USDT with no assets backing it, cheating on treasury audits, and faking trading volume.
In October 2021, Bloomberg alleged that Tether holds over $30B in commercial paper, which would have made it the seventh-largest holder of this type of debt. Commercial paper is high-risk, short-term debt issued by corporations. This March, hedge fund Fir Tree Capital Management took a large short position against Tether. Essentially, the fund took out a loan that will be repaid in USDT, so if Tether crashes, it can pay back the loan in the collapsed stablecoin.
Tether could collapse if there is a major market-wide downturn because it holds non-cash assets in its treasury. If every USDT is not backed 1:1 by an actual US Dollar, which we know it isn't, then it's possible that Tether's treasury contains assets that are worth significantly less than the $76.6B market cap of USDT. Some investors believe that if there is a bank run on USDT, Tether cannot cash out every USDT for $1.
A Tether collapse could be devastating for the entire crypto market. The stablecoin is the most traded crypto by volume. USDT is also included in Curve's 3pool–a stablecoin liquidity pool that acts as the liquidity for other crypto protocols representing billions in market cap. If the 3pool collapses, the entire Ethereum decentralized finance space will probably collapse with it.