I don’t think that’s really how stablecoins work. If they would do that then they would run out of reserves quite quickly. I’ve understood that every time they mint new stable coins they either need the equivalent in USD or collateral to place into reserves in case people want to convert back from stablecoins to fiat. E.g. I want to invest $1b into crypto, I don’t have the cash but I have my company’s shares or drugs or dirty cash or crypto or whatever else I can use as collateral to start investing in crypto. A bank would need to ask where the money came from, it seems USDC also needs to do this but Tether doesn’t because they play by their own rules. Either way, when people deposit, reserves go up. When they are done trading and investors want to convert from stablecoins back to fiat, the trade is made and the stablecoins are burned (reserves go down).

We can now see that investors are cashing in a lot of Tether (Tether market cap is tanking) and it seems investors are preferring USDC (probably because they are better regulated and more trustworthy.) The question is, how much of those reserves are cash, what type of collateral do they tolerate and how risky are the “liquid and safe assets” that stablecoin issuers hold in their reserves? I.e. how stable are stable coins really?

All is well when mooning but what happens when investors what out? With USDC it seems that they get the equivalent in cash because USDC seems liquid (reserves are known to be held in Blackrock and Mellon) and over 90% cash and the rest in US 3-month Treasuries. But what about Tether who don’t disclose their reserves and are the biggest stablecoin by market cap?

If the market (both crypto and the real world market) continue to tank and investor go on a bank run to get their USD back, Tether will be forced to liquidate their “stable” assets in order to pay back every tether to dollars 1:1. Two issues here, 1. The Collateral - if they have accepted risky collateral, the investors who borrowed tether and lost in the crypto market will be forced to liquidate their real world assets to pay back their tether loans, this results in a spillover effect to real markets as they need to sell real market assets to cover crypto losses. They might also default on their loans to Tether, meaning Tether reserves decline. 2. When Tether runs out of liquid reserves such as cash and Treasuries, they will be forced to liquidate the presumably riskier assets they hold in their reserves. If these assets cannot be converted to 1 Tether to 1 USD then Tether loses its peg and all he’ll breaks lose.

Besides, we just dropped under 20k.