In recent days, on the over-the-counter trading platforms of many exchanges, there has been a premium in the price of USDT against other currencies. Does such a premium mean that more over-the-counter funds are entering the market?

1 The reason why USDT can be stable as a stable currency

As a bridge between legal currency and cryptocurrency, USDT has always had two major markets. One is the exchange of various cryptocurrencies for USDT, including the market on centralized exchanges and Defi; the other is USDT 1:1 exchange for U.S. dollars This market is mainly composed of USDT official exchanges, major over-the-counter traders and some USDT/USD trading pairs on compliant exchanges.

The price of USDT for various cryptocurrencies is determined by the market, and Tether cannot intervene. But the price of USDT to USD, Tether must ensure that it is 1:1, otherwise USDT will not be able to play the role of a stable currency. Therefore, Tether officially promises a 1:1 exchange between USDT and USD. For some major U.S. dollar over-the-counter traders, it also relies on Tether's official exchange.

However, checking the official website of Tether, we can see that the official exchange threshold for US dollars is at least 100,000 US dollars, and the handling fee is 1,000 US dollars or the exchange amount * 0.001, whichever is higher. It can be seen that for retail investors, go to Tether official Not the best choice.

In Tether's [User Terms], there is such a paragraph:

"Tether reserves the right to delay the exchange to users' U.S. dollars when liquidity problems or losses occur in Tether's reserve assets. At the same time, Tether reserves the right to exchange into user securities or other reserve assets held by Tether."

In other words, when a user takes USDT to exchange for U.S. dollars with Tether, Tether may have no money to redeem, or it may only give the user some equivalents that it holds.

As we all know, Tether does not hold the equivalent of its total amount of USD issued, but holds the same amount of assets. What constitutes these assets, Tether has not yet announced to the outside world.

Therefore, Tether's main method of maintaining the USDT stable currency exchange rate is to maintain a 1:1 exchange rate by making market on the USDT/USD trading pair. There are currently three major USDT/USD exchanges, namely Bitfinex (24-hour trading volume of more than 70 million U.S. dollars), Kraken (24-hour trading volume of more than 40 million U.S. dollars) and FTX (more than 30 million U.S. dollars). The three are 24 hours. The total transaction volume is 150 million US dollars. For Tether, which has more than 40 billion assets, it is easy to maintain the exchange rate through market making.

2 Why USDT will have a premium

USDT does not have an on-exchange market for fiat currency, but only over-the-counter transactions. Due to the high degree of decentralization of over-the-counter transactions, for Tether, it is obvious that it is impossible to find an effective market-making method to maintain the exchange rate at 1:1. Any price deviation is due to changes in the balance of supply and demand, and the value of USDT deviates from the official exchange rate of US dollars to RMB, there are two possibilities.

One is that the supply and demand balance of OTC transactions is broken, and supply exceeds demand. Sellers cannot meet the huge market demand, so USDT has produced a premium;

The second is that the balance of supply and demand of cryptocurrencies on the market has been broken, and people are changing cryptocurrencies into stable currencies, which has created a premium for USDT.

In either case, Tether needs to increase the supply of USDT to ensure the stability of the exchange rate. On March 12, 2020, the market was in extreme panic. Many people were eager to exchange cryptocurrencies for stablecoins to hedge, which caused a huge premium of usdt.