Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom)Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
Chain News ChainNews (ID: chainnewscom)
, by Richard K Lyons and Ganesh Viswanath-Natraj, translated by Lu Jiangfei, published with permission.
Will the continuous issuance of stablecoins bring inflation to the prices of cryptocurrencies such as Bitcoin?
Perhaps many people will give an affirmative answer, but our research results are the opposite: the issuance of stablecoins will not drive the price of cryptocurrency to skyrocket, but to continuously maintain the decentralized system linked to the exchange rate, and in digital assets Serving as a safe haven in the economy—especially during the market panic caused by the new crown virus epidemic in March 2020, stablecoins were able to buck the trend and command a premium.
So, to what extent do stablecoin issuances drive the price of Bitcoin and other cryptocurrencies?
This article will be based on the analysis of Lyons and Viswanath Natraj (2019) on the joint hypothesis research results of Griffin and Shams (2018). Generally speaking, there is currently no systematic evidence that the additional issuance of stablecoins pushes up the price of cryptocurrencies. But at the same time, we found evidence for other hypotheses, specifically:
The additional issuance of stablecoins is an original response to the deviation between the secondary market exchange rate and the anchored exchange rate of stablecoins;
As a "safe haven", stablecoins play an important role in the digital asset economy. For example, during the market panic caused by the new crown virus epidemic in March 2020, stablecoins were able to buck the trend and command a premium.
From the perspective of development prospects, the use of stablecoins has increased significantly in the past two years. For example, in January 2019, the trading volume of BTC/Tether exceeded that of BTC/USD, and Tether is currently the stablecoin with the largest market value. As David Yermack, chair of the finance department at NYU Stern School of Business, put it in 2015:
The reason why the use of stablecoins will grow rapidly is consistent with their "reason for existence", that is, to solve the problem of cryptocurrency value storage by anchoring with the US dollar.
If a stablecoin is managed by a centralized issuer, it could in principle decide for itself whether to increase the money supply, with potentially inflationary effects on cryptoasset pricing. In fact, this question is very important to know that Tether Inc., the company behind Tether, the largest stablecoin by market value, is currently facing prosecution: As of October 2019, the class action allegations against Tether mainly include:
Tether is not backed by a 1:1 USD reserve;
The class action claims that Tether Inc. conspired with Bitfinex to increase the supply of stablecoins, which triggered a rapid rise in bitcoin prices in late 2017. In a recent paper published by Griffin and Shams (2018), Tether Inc. and Bitfinex were also suspected of collusion, and also provided evidence that Bitfinex expanded the supply of Tether tokens at the end of 2017 to boost the price of Bitcoin. However, if the stable currency is only used to meet the transaction needs of investors, we expect that the additional issuance will not have a systematic impact on the price of Bitcoin.
Getting started with Tether
In order to understand what role Tether has played in driving up the price of encrypted assets, let's first introduce how Tether was created. Figure 1 below outlines the process of creating a Tether by collateralizing a USD deposit.
Figure 1: Tether creation process before 2018
Similar to a linked exchange rate system, every Tether stablecoin issued will in principle be 100% backed by US$1, so if there is a run on Tether, investors can redeem their Tether with the equivalent US dollar. Tethers are created when investors deposit USD into a Tether account, and an equivalent Tether supply is introduced into the token circulation. Prior to 2018, nearly all Tethers created through grants were immediately distributed to Bitfinex and transferred to other cryptocurrency exchanges to be traded on secondary markets. (Lianwen Note: Linked exchange rate system, Currency Board, referred to as linked exchange rate, also known as currency board system, banknote bureau, currency board system, currency board, currency board mechanism, currency board arrangement, is a fixed exchange rate system, That is to fix the exchange rate between the local currency and a specific foreign currency, and strictly follow the established exchange ratio, so that the currency issuance is linked with the foreign exchange reserves. If the linked currency is the US dollar, it can also be called the "dollarization system.")
But in 2018, things changed: the Tether Treasury currently holds a small percentage of Tether's total circulating tokens. In Figure 2 below, we can see the total amount of Tether that has flowed into the secondary market in recent years, as well as the trend of Tether reserves retained by Tether Treasury, with the most obvious change in 2018. In fact, this chart is very important for whether Tether will have an impact on the price of Bitcoin. We need to add together the amount of Tether in circulation and the net Tether storage in the Tether Treasury as a reserve. Tether Treasury holds Tether tokens through its reserve account. If the price of Tether in the secondary market is higher than the anchor price, Tether Treasury can sell Tether tokens to ensure the stable currency of the anchor relationship.
image description
Note: The above figure shows the total amount of Tether in circulation, including the Tether circulation in the secondary market (investors and exchanges) and the Tether Treasury reserve, which are distinguished by red and blue. Data comes from Omniexplorer and Etherscan API.
Here, the first thing we want to test is: After knowing the Tether supply and Bitcoin price changes, evaluate whether the Tether supply changes have an impact on the Bitcoin price. By using two-way feedback and hysteresis effect evaluation methods, we performed a more accurate calculation of the Tether circulation in the secondary market, and found that changes in Tether supply have a significant impact on mainstream non-stable cryptocurrencies (such as Bitcoin and Ethereum in Figure 3). Prices had no major impact. The conclusions of this test apply to the sample period selected for this test (August 2017 to November 2019)—it is worth mentioning that the time point of December 2017 when the cryptocurrency market soared was also included in this test During the selected sample period, at the same time, the test conclusions are also applicable to other mainstream stablecoins.
However, the results of this test do not rule out the possibility of price manipulation, but based on Tether’s total circulation data, there is no systematic evidence that Tether has manipulated the price of Bitcoin. In other words, stablecoins including Tether are more like a decentralized exchange rate peg system, and will not have an intervention effect on prices through additional issuance. On the contrary, Lyons and Viswanath-Natraj (2019) argued that stablecoins are more like an "instrumental currency" in their paper, and their use depends on other factors. Let's take a look at these "other factors" below
image description
Figure 3: Changes in the price of Bitcoin and Ethereum after the issuance of Tether
Note: The figure above uses the method of Jordà, Ò (2005) in "Estimation and inference of impulse responses by local projections," American Economic Review, pp. 161-182, analyzing The impact of Tether’s additional issuance on the price changes of Bitcoin and Ethereum in the secondary market. The secondary market circulation data comes from Omniexplorer and Etherscan, and the price data comes from cryptocompare.
Fundamentals of Stablecoin Issuance
in conclusion
The study found that the first factor that prompts Tether to flow into the secondary market is: Tether's market price deviates from the 1:1 anchor price with the US dollar. For example, sometimes the Tether US dollar price in the cryptocurrency market will be higher than par. In this case , investors can buy Tether from Treasury according to the 1:1 anchor price, and then only need to sell Tether in the market at the actual exchange rate (which is higher than the 1:1 anchor exchange rate) to make a profit, which also leads to a large number of Tether flows out of the Treasury and into the secondary market. Based on empirical analysis, we have also found some strong evidence, that is, when Tether’s dollar peg increases by 100 basis points (1 cent), it will lead to an inflow of about 300 million US dollars into the secondary market, and the participation of secondary market participants in this This kind of arbitrage behavior can actually be seen as a decentralized solution to ensure the stability of Tether's exchange rate.
