Will the increase in USDT issuance drive Crypto inflation?

• Coinage is more friendly to price increases, but it is not strongly correlated with price increases or decreases, and coinage has little effect on price increases.

• The coin has no great predictive value for the "+V" and "+L" market conditions.

• Stablecoin minting has a greater impact on price rebound than on price increase

• There is no direct causal relationship between the rise in Crypto prices and the increase in the issuance of USD stablecoins. Instead, the argument that "market demand has put pressure on the issuance of stablecoins" is more convincing. Minting is likely to just push up the price of the currency by taking advantage of the rising market.

1. Introduction: Is there inflation in the Crypto world?

Since the beginning of 2020, news about Tether's large-scale minting of USDT has frequently appeared in Crypto media pushes, and the second largest stablecoin USDC has also started to "print money" after entering 21 years. The market value of the two US dollar stablecoin projects has also surged from $4.1 B and $0.51 B at the beginning of 2020 to the current $78.4 B and $44.3 B, respectively, achieving a dozens-fold increase in just two years, ranking 4th and 6th in the Crypto market value rankings.

The US dollar stablecoin is also called the "on-chain dollar", and the "coin issuing company" in Crypto plays a role similar to that of central banks in the real world - money supply. Therefore, Tether is also jokingly called the "Federal Reserve of the cryptocurrency world."

In the previous article, we discussed the impact of inflation on Crypto prices. The Federal Reserve's balance sheet has doubled since 2020, and the CPI (Consumer Price Index) has risen by 8.3%. The balance sheets of Tether and Circle have doubled 25 times, and the market value of BTC and ETH, which together account for 59% of the current cryptocurrency market value, has increased by 7 times in the past two years. Data compilation: OKLink

It can be seen that during the period when the two stablecoin companies were "printing money like crazy", Bitcoin also ushered in its fourth bull market. We can't help but wonder: Is there inflation in the Crypto world?

If Cryto also has inflation, is it caused by the issuance of stablecoins?

Is the increase in the issuance of stablecoins caused by market demand, or is it actively issued to drive up prices?

Before exploring this issue, let’s take a brief look at these two USD stablecoins and the companies behind them. As “risk-free assets” or “low-risk assets” in the cryptocurrency world, they must be extraordinary to have such a high market value.

2. Stablecoin working mechanism and the entity behind it

Let’s first look at the working mechanism of the US dollar stablecoin. Let’s take Tether as an example. The principle of Tether’s issuance is similar to that of a bank. For every 1 USDT token minted, 1 USD in cash or equivalent assets must be used as collateral. USDT holders can redeem 1 USD in their Tether account and return 1 USDT of “notes” at the same time.

How Tether works

USDT is a US dollar stablecoin issued by Tether in 2014 and is actually controlled by the owner of Bitfinex. USDT was originally created on the Omni protocol layer of the Bitcoin network and has been updated to be deployed on multiple blockchains, including Ethereum, EOS, Tron, Algorand, SLP and OMG.

USDC is a US dollar stablecoin issued by Coinbase and Circle, which is overseen by a consortium called Centre, of which Coinbase and Circle are two of Centre's founding members. Although most popular on Ethereum, USDC has also been issued on other blockchains such as Algorand, Solana, and Stellar.

3. Stablecoins are not equal to US dollars

It should be noted that although each USD stablecoin is anchored to $1 cash or equivalent assets, it is not USD after all. Therefore, whether it is USDT or USDC, the price will fluctuate within a certain range. Here we briefly summarize the factors that cause the price fluctuation of USD stablecoins:

1. Counterparty risk: The centralized Tether system has the possibility of a Ponzi collapse, and some regulatory and data leaks may cause the USDT price to fall below $1.

2. Compared with the US dollar fiat currency, its advantages: anonymity, resistance to regulation, convenient transfer, low fees, etc. may all push up the demand for USDT.

3. Trading: If BTC and ETH are gold or commodities in the Crypto world, whether to store assets in a "bank" in the form of legal currency (stable currency) or in gold (BTC), stocks (large currencies), or financial products (Defi) in the form of notes depends on the choice of investors. Specifically, when the price of Crypto falls, traders seek to exchange tokens for USDT for risk hedging (demand point). If USDT liquidity is insufficient, the price will rise; when the price of Crypto rises, people are in urgent need of selling USDT to buy tokens, and there is an oversupply, so the price temporarily falls.

Based on the above stablecoin demand points, we can get some speculation about the relationship between stablecoin supply and price trend:

The demand for stablecoins has pushed up the price of USDT. In order to stabilize the price, the market supply needs to be increased.

The following figure can support the above speculation, that is, when the price fluctuates, the on-chain activities (coinage or destruction) of stablecoins are also relatively active. Data source: OKLink

However, does the rise in the overall market value of Crypto really have nothing to do with Tether/Circle?

This brings us back to the question at the beginning: is the increase in the issuance of stablecoins caused by demand, or is it actively issued to drive up prices?

4. Methodology & Data

Since neither USDT nor USDC supplies Bitcoin or Ethereum trading pairs separately, the conclusion drawn from observing the impact of USDT issuance on BTC or USDC issuance on ETH alone may be quite biased.

However, USDT+USDC accounts for 74% of the stablecoin market value, and BTC+ETH accounts for 59% of the cryptocurrency market value. Therefore, the conclusion we draw by grouping them and combining them as research objects will be relatively accurate.

Since the bull market retracement in the second half of 2018 has basically ended, it is a relatively complete bear-bull cycle from 2018 to now, so this article selects the time span from October 1, 2018 to January 12, 2021, with a total of 1,176 data. Each data corresponds to one day in the time span, including 4 blocks of raw data, namely: USDT circulation, USDC circulation, BTC price and ETH price.

1. On-chain behavior data

Data source: OKLink

After excluding the two days before and after and the three days before and after when there was no new USDT and USDC minting, it was found that from October 1, 2018 to January 12, 2022, Tether had a total of 763 on-chain activities, adding 75.4 B units of USDT, accounting for 96.3% of its current circulation. Among them, there were 602 minting behaviors (a total of 1176 data), a total of about 83 B units of USDT minted, an average of about 138M units/time; 161 destruction behaviors, a total of 7.5 B units destroyed, an average of 46.7M units/time. Data source: OKLink

Compared with USDT, USDC is more active on the chain, with a total of 1,082 minting and destruction activities during this period, and 43.9 B units of USDC were added, accounting for 99.8% of its circulation. In addition, the magnitude of each minting and destruction activity of USDC (corresponding to the "average" column in the table) is smaller than that of USDT, which is basically consistent with the market value ratio between them (1.7:1).

2. Minting vs. Price Trend after Minting

In order to observe the impact of stablecoin minting on prices, we divided all 1,176 data points into two groups: minting days and non-minting days. Among them, the day when the supply increases compared to the previous day is the minting day. The decrease in supply is considered a destruction behavior, and the unchanged supply is considered to be no on-chain activity, and the dates when both occur are classified as non-minting days.

In order to observe the price trend after the minting day and the non-minting day, we took 4 time intervals (X) backward: 1 day, 7 days, 14 days, and 30 days. Subtract the price of the day from the price after the corresponding time interval to get the "+X day difference". The formula is:

“+X day difference” = price(day+X)-price(day)

Add the "+X day difference" of the minting day and the non-minting day and calculate the average to get "SUM_X" and "AVG_X". Among them, AVG_X measures the impact of each minting/destruction behavior on the price of the next single day. The formula is:

AVG_X = Average(”+X day difference”)/X

In order to measure the impact of unit on-chain activity (minting or destruction) on price, we use "price_diff/unit" in different "+X day difference" to represent the change in price when a single stablecoin is minted (or destroyed), which is later called minting efficiency. The formula is:

“price_diff/unit” = “SUM_X” / SUM(mint/burn) / X

The "increase ratio" refers to how often the price increases/decreases after a minting day or a non-minting day.

The last column "diff" is the difference between the values ​​in the first two columns, that is:

“diff” = mint – burn & noneData source: OKLink

In the above table, five points of information can be seen from the horizontal and vertical directions:

(Horizontal)

• Increase ratio: The maximum difference between different time intervals (X) is only 5% (column "diff"). The frequency of price increases after minting and non-minting days is not much different.

• AVG_X: The correlation between minting day/non-minting day and price fluctuation (AVG_X positive/negative) is not strong. Only in the short period (one day) after destruction did the price fall overall, while the other three time intervals (X) all rose overall.

• price_diff: The efficiency of the impact of additional issuance of a single stablecoin on the price after the minting day and the non-minting day is not much different, and there is no obvious correlation between minting and "minting efficiency". Among them, the impact of the minting day on the price increase after 14 days and 30 days is not even as great as the impact of the non-minting day.

(Vertical)

• On days when stablecoins were minted, prices rose significantly, with BTC+ETH increasing by $43 to $57. On days when stablecoins were destroyed or there were no activities, prices fell steadily, with the price drop being more obvious on the second day.

• Mint: Among different time intervals (X), the "coinage efficiency" after 1 day and 30 days is relatively large, but the overall efficiency of the impact of the issuance of a single stablecoin on the price is not much different.

In summary, coinage is more friendly to price increases, but it does not have a strong correlation with price increases or decreases, and coinage does not significantly help the extent of price increases.

However, simply analyzing the rise or fall after coin minting cannot fully explain the impact of coin minting on prices. It is also necessary to consider the changes in prices before and after coin minting.

3. Minting vs. Price Trend Before and After Minting

Here, for convenience, we take the price three days ago as the price change before minting ("diff-3/3"), and compare it with the price after different time intervals (X) to get "Compare_X", the formula is:

“diff-3/3” = [price(day)-price(day-3)]/3

“Compare_X” = “ +X day difference ”/X – “diff-3/3”

"SUM_X" = sum("Compare_X")

“price_diff/unit” = “SUM_X” / SUM(mint/burn) / X

Data source: OKLinkData source: OKLink

It can be seen that after taking the pre-minting price into consideration (before & after), the positive impact of minting on the price ("price_diff/unit") is significantly weakened, and even reversed after comparing with the data after 7, 14, and 30 days, with the overall price falling relative to 3 days ago ("SUM" becomes negative).

Once again: coinage has little effect on price increases.

If coin minting has no obvious effect on the overall price, does it have any effect on certain special market conditions?

4. Coin minting vs. "+V" & "+L" market trends

The impact of a factor on price can be divided into positive and negative.

Positive effect can be divided into three forms:

“+V”: Rising after a decline

“+L” type: Accelerated rise after rising

“-L” type: Decline followed by a slowdown in decline

Negative effect can be divided into three forms:

“-V” type: rise followed by fall

“+T” type: rise followed by a slowdown in rise

“-T” type: decline followed by accelerated decline

Since this paper studies the relationship between coinage and price increases, we only select the “+V” and “+L” types in the positive effect for analysis.

Data source: OKLink

Note:

The "+V" type (Total) line lists the number of "+V" type market conditions that appear at different time intervals (X) in all 1176 data points;

The "+V" type (mint) line lists the number of "+V" type market conditions that occurred at different time intervals (X) on the minting day (880 data points);

The same applies to the “+L” type.

Although the newly minted stablecoins are generally beneficial to the price trend, only 231 out of 880 mintings (+7 days) had a "reversal effect" on the price, that is, a "+V-shaped" trend. If you rely solely on stablecoin minting as a guide to the market bottom turning point, there is only a 26% chance of "guessing correctly".

Therefore, coin minting has no predictive value for price turning points.

From the data in the “Ratio” row in the table, we can see that the minting of stablecoins is relatively friendly to the “+V” type market (“Ratio” exceeds 57%), but it is not very obvious. When the “+L” type market appears, the proportion of minting days is not high.

In other words, coin minting does not have much predictive value for the "+V" and "+L" market conditions. Data source: OKLinkData source: OKLink

When the “+V” and “+L” market conditions appear, the “price_diff/unit” relative to the overall data (mint+burn+none) increases significantly, with a double-digit difference. This shows that under the above market conditions, the “positive effect” of coin minting on the market is more obvious.

In other words, the minting of stablecoins is likely to push up the price of the currency by taking advantage of the rising market conditions.

Compared with the “+V” type and the “+L” type, the “+V” type performs better than the “+L” type in terms of both “coinage efficiency” and the number of increases.

That is to say, the minting of stablecoins has a greater impact on price rebounds than on "boosting" prices during price increases.

V. Summary

Although the overall price of stablecoins (USDT and USDC) has increased after minting, there are confounding factors between the two, namely price expectations and stable stablecoin prices. The data in this article show that there is no obvious correlation between the minting of stablecoins and the price trend after minting, and minting has no predictive value for price increases. It is difficult to conclude that the increase in the issuance of stablecoins directly leads to an overall increase in market prices.

Therefore, we infer that there is no direct causal relationship between the rise in Crypto prices and the increase in the issuance of USD stablecoins. Instead, the argument that "market demand puts pressure on the issuance of stablecoins" is more convincing. Minting is likely to push up the price of the currency just by taking advantage of the rising market. The assumption that "actively increasing the issuance in order to push up prices" is untenable.

Written by: Mabrary