BTC, USD, USDT – When things destabilize in this love triangle.
BTC, USDT and USD are three currencies of extremely different nature which causes serious discrepancies in their exchange rates with respect to each other due to different demands, decentralization, regulatory restrictions, liquidity, and size of the market.
Stablecoins are commonly used in the cryptocurrency market as a hedge against Bitcoin (BTC) and other top altcoins. Converting their holdings into stablecoins protects their value. Looking at monthly volume rankings, you can observe that Tether (USDT) has the highest trading volume, only second to bitcoin. The prices of USDT vary considerably in international cryptocurrency exchanges, specifically at the time of heavy bull and bearish runs of Bitcoin or other cryptocurrency exchanges. During this time, the demand or supply of USDT or other stable coins are extremely high because the market participants are strategizing their trades with the help of the stablecoins. The major difference between the USD & USDT is the concept of the decentralized market. The US Dollar is one of the leading currencies in the world. On the other hand, USDT is a blockchain-based Stablecoin that is used for trading for $1 USD. This means the value of each USDT or other stable coins which are pegged to USD will hop very close to 1 USD.
When the traders exchange fiats with stable currencies on international exchanges (other than USD markets), this forms a 3-way triangle between the USD, USDT, and the 2nd fiat currency (let’s call it Fiat#2). Now, below are the three distinct areas where the exchange between these 3 currencies happen:
• The exchange rate of USD and Fiat#2 are determined by the forex markets.
• USDT is directly pegged to USD.
• In ideal situations, the exchange rate between Fiat#2 and USDT should be closely equal to the exchange rate between Fiat#2 and USD.
Adding to this, one of the most important thing to note here is that the price of USDT with respect to the local currency of the country, i.e. Fiat#2, is dependent upon the demand of USDT in the local demand and supply of USDT in the country due to the correlation which is getting established in the above triangle.
In extreme market situations, the demand of USDT upswings dramatically. This unanticipated demand causes large discrepancies in the 3-way triangle because one side of the triangle exchanges fiat-crypto, one side exchanges crypto-crypto, whereas the third side exchanges fiat-fiat. All these 3 sides differ enormously in terms of liquidity, size, fiat stored in collateral of the stablecoin, and most importantly, decentralization. Based on the analysis conducted by CoinDesk, different stablecoins have displayed massive variations at a single point of time. There have been situations when buying Bitcoin has been $700 more expensive compared to buying it from GUSD.
It is extremely crucial to note that none of these 3 exchange rates and the currency prices are decided by the cryptocurrency exchange like CoinDCX as the exchange rates are purely dependent upon the market’s conditions (which vary substantially in this case). The cryptocurrency exchanges have no control or a slightest of influence on the prices of these 3 currencies when calculated in pairing with each other.
