Since 2020, the issuance speed of USDT has far exceeded previous years, driving a surge in its market capitalization. As of April 2022, USDT's market cap exceeded $82.7 billion, ranking third in the crypto market, just behind Bitcoin and Ethereum, making it the largest stablecoin by market share. USDT provides extremely high liquidity, with a daily turnover rate typically ranging from 200% to 500%, and daily trading volumes reaching $50 billion to $100 billion.

As a crucial bridge for funds entering and exiting the crypto market, changes in the demand for USDT can reflect investor interest in the crypto market. An important metric for gauging changes in USDT demand is the "USDT OTC premium."

What is USDT OTC premium?

In theory, the price of USDT should be equivalent to the U.S. dollar. However, in reality, USDT is often priced higher or lower than the dollar, resulting in a premium or discount. The USDT OTC premium refers to the ratio of the OTC market price to the dollar. Generally, prices are influenced by supply and demand. Excessive demand for digital assets often pushes this metric above 100% of its fair value, resulting in a positive premium. Conversely, when crypto market demand is weak, lower USDT market prices can lead to a discount rate of 4% or more, resulting in a negative premium. Thus, the USDT OTC premium can reflect retail demand for digital assets and serve as a reference for short-term market liquidity and activity. In short, the more people buy USDT, the higher its price, leading to a positive premium. The opposite is also true.

Historical data shows that USDT OTC premiums are mostly positive during bull markets. For example, during the 2017 bull run, the USDT OTC premium once reached +5.76%, as off-market funds continuously flowed into the crypto market via USDT. In bear markets, USDT typically trades at a negative premium. For instance, on October 16, 2018, from 1:00 PM to 2:30 PM, USDT's exchange rate against the Chinese yuan dropped sharply from 6.70 to 6.20, representing a premium rate of -8%.

The USDT OTC premium affects trading costs—how to check it?

When the market experiences a sharp downturn, many investors need to convert their tokens into stablecoins or fiat currencies to hedge risks. At this point, the change in demand becomes critical, and USDT may shift from a positive to a negative premium.

For example, during the March 12, 2020, crash, the market was gripped by extreme panic. Many sought to exchange their tokens for stablecoins to hedge, while other off-market investors rushed to buy the dip. This led to a USDT premium as high as 14.29%. At the same time, stablecoin liquidity on nearly all decentralized exchanges was nearly exhausted. From this point onward, USDT issuance surged, with most of the newly minted coins flowing into centralized exchanges. When the supply of USDT became sufficiently large, negative premiums began to appear in fiat trading pairs.

Since fund inflows and outflows vary across platforms, USDT premiums can also differ. Of course, no single metric is foolproof. When making investment decisions, it’s essential to consider other factors, such as fundamentals, technical indicators, economic conditions, and regional conflicts.

How does USDT maintain price stability after a premium occurs?

The USDT OTC premium serves as an indicator of market conditions, and as a real price fluctuation, it also impacts future market trends. A positive USDT premium can drive up the prices of major cryptocurrencies, and fewer people may sell USDT for cash withdrawals, which is also beneficial for the on-market environment. Conversely, a negative premium is generally unfavorable for the market, as it can trigger large-scale capital outflows.

Generally, positive and negative USDT premiums are normal, as price fluctuations are inherent in any healthy market. However, as a stablecoin, "stability" is USDT's primary purpose, so it has built-in correction mechanisms.

First, USDT is pegged to the U.S. dollar in the real world, allowing users to exchange USDT for dollars at a 1:1 ratio. Therefore, when significant premiums occur, the market naturally engages in arbitrage until prices stabilize.

Additionally, Tether adjusts supply to stabilize USDT prices: when USDT trades at a positive premium, large amounts of USDT are often observed being transferred from Tether's accounts, which the market interprets as "issuance"—a reactive measure. Conversely, after a prolonged period of negative premiums, Tether may choose to withdraw and burn a portion of USDT to maintain ecological balance in the trading market.

From 2015 to the present, USDT has issued over $70 billion, coinciding with the crypto market's total capitalization peaking at $3 trillion. USDT's movements are undoubtedly a major market indicator, warranting close attention from investors.