The additional issuance of USDT promotes Crypto inflation?

  • Coinage is more friendly to price increases, but it has no strong correlation with price increases or decreases, and coinage has little effect on price increases
  • Minting coins do not have much predictive value for “+V” and “+L” market prices
  • Compared with the process of price increase, stablecoin minting has a greater impact on price rebound
  • The increase in the price of Crypto has no direct causal relationship with the additional issuance of USD stablecoins. On the contrary, it is more convincing to say that “market demand has put pressure on the issuance of stablecoins”, and minting coins is likely to drive the price of coins higher through rising market conditions.

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

In the past 20 years, the news of Tether’s large-scale minting of USDT has often appeared in Crypto’s media feeds, and the second largest stable coin USDC has also opened a “money printing machine” after 21 years. The market value of the two USD 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. In just two years, they have achieved dozens of times of increase, ranking 4th in the Crypto market capitalization list. bit and bit 6.The additional issuance of USDT promotes Crypto inflation?

The USD stablecoin is also known as the “on-chain dollar”, and the “coin issuing company” plays a role in Crypto that is similar to the role of central banks in the real world – money supply. Therefore, Tether is also dubbed the “Federal Reserve of the Currency Circle”.

In the previous article, we discussed the impact of inflation on the price of Crypto. The Fed’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 by 25 times, and BTC and ETH , which together account for 59% of the current cryptocurrency market value, have increased their market value by 7 times in the past two years.The additional issuance of USDT promotes Crypto inflation?Data curation: OKLink

It can be seen that Bitcoin also ushered in its fourth bull market during the period when the two stablecoin companies were “madly printing money”. 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 additional issuance of stablecoins caused by market demand, or is it actively additional issuance to drive prices up?The additional issuance of USDT promotes Crypto inflation?

Before exploring this question, let’s take a brief look at these two USD stablecoins and the companies behind them. As the “risk-free assets” or “low-risk assets” in the currency circle, they must not be easy to achieve such a high market value.

2. Stablecoin working mechanism and entities behind it

Let’s first look at the working mechanism of the USD stablecoin. Let’s take Tether as an example. The principle of Tether’s currency issuance is similar to that of a bank. For every mint of 1 USDT token, USD1 of cash or equivalent assets must be used as collateral; USDT holders can redeem Return (redeem) 1 USD in the Tether account, and at the same time return the “note” of 1 USDT.

The additional issuance of USDT promotes Crypto inflation?

Tether working mechanism

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

USDC is a U.S. dollar stablecoin issued by Coinbase and Circle, overseen by a consortium called Centre, two founding members of Centre. Despite being the most popular on Ethereum, USDC has also been issued on other blockchains such as Algorand, Solana, and Stellar.

3. Stablecoins are not equal to the US dollar

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

  1. Counterparty risk: The centralized Tether system may collapse, and some regulatory and data revelations may cause the USDT price to be lower than 1$.
  2. Compared with the US dollar fiat currency, factors such as anonymity, anti-regulation, convenient transfer, and low handling fees may push up the demand for USDT.
  3. Trading: If BTC and ETH are gold or commodities in the Crypto world, should the assets be stored in the “bank” in the form of legal currency (stable currency) or in gold (BTC), stocks (big currency), or wealth management in the form of bills In the product (Defi), it depends on the investor’s choice. Specifically, Crypto prices fell and traders sought to exchange tokens for USDT as a safe haven (demand point). If the liquidity of USDT is insufficient, the price will rise; the price of Crypto will rise, and people urgently need to sell USDT to buy tokens, and the supply will exceed demand, and the price will temporarily drop.

From the above demand points for stablecoins, we get a little guess about the relationship between stablecoin supply and price movements:

The demand for stablecoins pushes up the price of USDT, and in order to stabilize the price, it is necessary to increase the market supply.

The following figure can support the above speculation, that is, when the price fluctuates, the on-chain activities (minting or burning) of stablecoins are also more active.The additional issuance of USDT promotes Crypto inflation?Data source: OKLink

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

This goes back to the question at the beginning. Is the additional issuance of stablecoins caused by demand, or is it actively additional issuance in order to push prices up?

4. Methodology & Data

Since neither USDT nor USDC separately supply Bitcoin or Ethereum trading pairs, the conclusions drawn from the separate observation of the impact of the additional issuance of USDT on BTC or the additional issuance of USDC on ETH may be quite biased.

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

Since the retracement of the bull market in the second half of 2018 is basically over, it is a relatively complete bear and bull cycle from 2018 to the present, so this article selects the time span from 2018.10.1 to 2021.1.12, with a total of 1176 data. Each piece of data corresponds to one day in the time span, including 4 pieces of original data: USDT circulation, USDC circulation, BTC price and ETH price.

1. On-chain behavior data

The additional issuance of USDT promotes Crypto inflation?Data source: OKLink

After excluding the two days before and after and the three days before and after no new USDT and USDC coins were minted, 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 to 96.3% of its current circulating supply. Among them, there were 602 minting actions (1176 pieces of data in total), with a total of about 83 B units of USDT minted, with an average of about 138M units/time; 161 destruction actions, a total of 7.5 B units were destroyed, with an average of 46.7M units/time.The additional issuance of USDT promotes Crypto inflation?Data source: OKLink

Compared with USDT, USDC is more active on the chain. During this period, a total of 1082 minting and burning activities were performed, and 43.9 B units of USDC were added, accounting for 99.8% of its circulation. In addition, the movement range of each minting and burning activity of USDC (corresponding to the “average” column in the table) is smaller than that of USDT, which is basically consistent with the ratio of market capitalization (1.7:1) between them.

2. Minting vs. price trend after minting

In order to observe the impact of stablecoin minting on price, we divided all 1176 data into two groups: minting date and non-minting date. Among them, the minting day is when the supply increases from the previous day. A drop in supply is a destruction behavior, an unchanged supply is considered no on-chain activity, and the date on which both occur is classified as a non-minting date.

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

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

Add the “+X day difference” of the minting day and non-minting day, and get “SUM_X” and “AVG_X” after averaging. Among them, AVG_X measures the price impact of each minting/destroying behavior on the subsequent day, and the formula is:

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

In order to measure the impact of on-chain activity (minting or burning) on ​​the price of a unit, we use “price_diff/unit” in different “+X day difference” to represent the price change when a single stablecoin is minted (or burned), which is referred to as Minting efficiency, the formula is:

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

The “increase ratio” refers to the frequency of price increases/decreases after minting or non-minting days.

The last column “diff” is the difference of the values ​​of the first two columns, namely:

“diff” = mint – burn&noneThe additional issuance of USDT promotes Crypto inflation?Source: OKLink

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

(horizontal)

  • increase ratio: A maximum difference of only 5% between different time intervals (X) (column “diff”). There is little difference in the frequency of price increases after minting and non-minting days.
  • AVG_X: The correlation between the minting day/non-minting day and the price fluctuation (positive/negative of AVG_X) is not strong, only the overall price declines in the short term (one day) after the destruction, and the other three time intervals (X) are all overall rise.
  • price_diff: There is little difference between the efficiency of the additional issuance of a single stablecoin after the minting date and the non-minting date on the price, and there is no obvious correlation between coinage and “coinage efficiency”. Among them, the impact of the minting day on the price increase after 14 days & 30 days is even less than that of the non-minting day.

(portrait)

  • In the days when the stablecoin was minted, the price increased significantly, and the increase of BTC+ETH was between $43 and $57. On the days when the stablecoin was destroyed and there was no activity, the price basically dropped steadily, and the price dropped more obviously on the second day.
  • mint: In different time intervals (X), the “coinage efficiency” after 1 day and after 30 days is relatively large, but the overall efficiency of the additional issuance of a single stablecoin on the price is not much different.

To sum up, coinage is more friendly to price increases, but it has no strong correlation with price increases or decreases, and coinage does not significantly help the magnitude of price increases.

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

3. Coinage vs price trend before and after coinage

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) / XThe additional issuance of USDT promotes Crypto inflation?

Data source: OKLinkThe additional issuance of USDT promotes Crypto inflation?Data source: OKLink

It can be seen that the positive impact of coinage on price (“price_diff/unit”) is significantly weakened after the pre-mint price is taken into account (before&after), and even after 7, 14, and 30 days after the data is compared. Reversed, the price fell as a whole relative to 3 days ago (“SUM” was negative).

Again: coinage has little effect on price increases.

If the effect of coinage on the overall price is not obvious, does it have an effect on some special forms of the market?

4. Minting vs “+V” & “+L” market

The impact of a factor on the price is divided into positive and negative. in,

Positive effect can be divided into three forms:The additional issuance of USDT promotes Crypto inflation?

“+V”: rise after falling

“+L” type: Accelerated rise after rising

“-L” type: slow down after falling

Negative effect is divided into three forms:The additional issuance of USDT promotes Crypto inflation?

“-V” type: rise followed by fall

“+T” type: decelerate and rise after rising

“-T” type: the decline accelerates after the 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.

The additional issuance of USDT promotes Crypto inflation?

Data source: OKLink

Note:

The “+V” type (Total) row lists the number of “+V” type market quotations at different time intervals (X) in all 1176 data;

The “+V” type (mint) row lists the number of “+V” type market quotations in different time intervals (X) in the minting day (880 pieces of data);

“+L” type is the same.

Although the newly minted stablecoins are generally positive for the currency price trend, only 231 of the 880 minted coins (+7 days) have a “reversal effect” on the price, that is, a “+V-shaped” trend. If you simply rely on stablecoin minting as the bottom inflection point of the market to judge the price trend, there is only a 26% probability of being able to “guess correctly”.

Therefore, coinage has no predictive value for price inflection points.

From the data in the “Ratio” row in the table, it can be seen that the stablecoin minting is relatively friendly to the “+V” type market (“Ratio” exceeds 57%), but it is not very obvious. When there is a “+L” type market, the proportion of the minting day is not high.

That is to say, coinage does not have much predictive value for “+V” type and “+L” type market.The additional issuance of USDT promotes Crypto inflation?Data source: OKLinkThe additional issuance of USDT promotes Crypto inflation?Data source: OKLink

When the “+V” type and “+L” type quotations appear, the “price_diff/unit” relative to the overall data (mint+burn+none) is significantly improved, and there is basically a double-digit difference. It shows that under the above market conditions, the “positive effect” of coinage on the market is more obvious.

That is to say, stablecoin minting is likely to drive the price of the currency higher by the rise of market conditions.

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

That said, stablecoin minting has a greater impact on price rebounds than it does when prices rise.

V. Summary

Although the price of stablecoins (USDT and USDC) has risen as a whole after the minting, there are price expectations & confounding factors that stabilize the stablecoin price between the two. The data in the article shows that there is no obvious correlation between the minting of stablecoins and the price trend after minting, and the minting has no predictive value for price increases. It is difficult to conclude that the additional issuance of stablecoins directly leads to an overall increase in market prices.

Therefore, we infer that the increase in the price of Crypto has no direct causal relationship with the issuance of USD stablecoins. On the contrary, it is more convincing to say that “market demand has put pressure on stablecoin issuance”. It is likely that minting coins are only driven by rising market prices to push the price of coins higher. foot.

The additional issuance of USDT promotes Crypto inflation?

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/the-additional-issuance-of-usdt-promotes-crypto-inflation/
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