Tether USDT$1.0002, the world's largest stablecoin by market value, continues to shrink and looks set for a second straight monthly contraction, signaling challenging conditions for a sustainable broader market recovery.

Tether's market capitalization has dropped by 0.8% to $183.61 billion this month, extending January's 1% slide from a record $186.84 billion, according to data source CoinDesk. This hasn't happened since TerraForm Labs' collapse in 2022, which wiped out billions in investor wealth and shook investor confidence in stablecoins.

"Stablecoins are the fuel that powers crypto markets. When the fuel drains, everything slows down, and that is exactly what we are watching unfold," Rachael Lucas, crypto analyst at BTC Markets, said in a post on LinkedIn.

Stablecoins are digital tokens whose value is pegged to an external reference, such as the U.S. dollar or other fiat currencies. They are often touted as tokenized versions of fiat currencies and help users bypass price volatility risks associated with other tokens, such as bitcoin.

That's why, over the years, they have evolved into funding currencies for crypto trading and a mode of moving capital across borders, including day-to-day payments in some regions.

The ongoing contraction in tether indicates capital outflows from the crypto market. This, coupled with tepid demand for U.S.-listed spot ETFs, casts doubt on the sustainability of potential recovery rallies in bitcoin and the wider crypto market.

Bitcoin BTC$65,449.12, the leading cryptocurrency by market value, has failed to build momentum since its downtrend paused near $60,000 on Feb. 6. Prices briefly bounced above $70,000 days later but have since pulled back to trade around $65,000, CoinDesk data show.

Note that the growth of other prominent stablecoins, such as the U.S.-regulated USDCoin (USDC), has stalled as well, though it's been more resilient than tether.

While USDC's market cap has recovered to nearly $75 billion from its January dip to $70 billion, it remains flat year to date.