USDT Supply Slides as Redemptions Accelerate

Key Insights

• USDT faced sharp monthly supply contraction.
• Stablecoin market cap rose despite USDT decline.
• Whales redeemed while new wallets accumulated.

Tether’s USDT moved toward its steepest monthly supply drop in three years as large holders increased redemptions in February. Artemis Analytics data showed circulating supply shrank by $1.5 billion this month after a $1.2 billion decline in January. The contraction echoed patterns last seen after the FTX collapse in late 2022, when liquidity stress hit centralized exchanges.

Bloomberg reported that the current pace placed USDT on track for its largest monthly pullback since that period of market dislocation. That shift occurred because redemptions outpaced fresh issuance during a month marked by reduced trading appetite. USDT remains the primary dollar-pegged stablecoin used as an entry vehicle into crypto markets, so supply changes often reflect liquidity cycles rather than price volatility alone.

Stablecoin Market Cap Holds Firm

DeFiLlama data showed total stablecoin market capitalization rose 2.33% in February, climbing from $300 billion to $307 billion. That expansion suggested capital rotated within the stablecoin sector instead of exiting entirely. While USDT and Circle’s USDC recorded declines of 1.7% and 0.9%, respectively, newer issuers captured incremental share.

Total stablecoin market capitalization. Source: DeFiLlama

World Liberty Financial’s USD1, linked to the Trump family, expanded its market capitalization by 50% over the past month and reached $5.1 billion as of Friday. That growth followed increasing listings across exchanges and deeper liquidity pools in decentralized finance protocols. The rotation indicated that stablecoin demand persisted, though issuer preference shifted during the month.

USDT still dominated the market with a capitalization of $183 billion, representing roughly 71% of the total stablecoin sector based on CoinMarketCap figures. However, the recent drawdown signaled that short-term liquidity providers trimmed exposure. Tether did not respond to requests for comment before publication.

Whale Redemptions And Fresh Wallet Demand

Nansen tracking data showed whale wallets offloaded $69.9 million USDT across 22 addresses over the past week. The selling pace represented a 1.6-fold increase compared with prior activity from that cohort. That move followed a broader pullback in leveraged trading volumes across centralized venues.

USDT on Ethereum, token God mode, one-year chart. Source: Nansen

The same dataset revealed that so-called smart money traders, defined by historical return profiles, also reduced holdings during the period. Their activity suggested portfolio rebalancing rather than panic-driven exits. In contrast, newly created wallets accumulated roughly $591 million worth of USDT over the past seven days, offsetting part of the redemption pressure.

That divergence indicated a split market structure. Larger holders appeared to redeem or reallocate capital, while newer participants absorbed supply at discounted liquidity premiums. Such patterns often emerge when institutions trim exposure while retail or smaller funds step in.

On Ethereum, Nansen’s one-year “Token God Mode” chart showed USDT balances trending lower among older wallets but rising among addresses created within the past fifteen days. That shift suggested distribution rather than uniform selling pressure. Circulating supply declined overall, yet wallet growth data implied sustained onboarding.

Product Structure And Liquidity Dynamics

USDT functions as a cash-equivalent instrument within crypto markets, serving as a settlement asset for derivatives, spot trades, and decentralized finance collateral. When traders reduce leverage or unwind positions, they typically redeem stablecoins into fiat. That product logic explained why supply contracted during periods of muted speculative demand.

The December 2022 supply decrease of $2 billion, recorded after FTX and its 150 subsidiaries collapsed, illustrated how redemptions spike during systemic stress. Current conditions differ, as broader stablecoin capitalization remained steady rather than collapsing. This contrast suggested that February’s pullback reflected portfolio rotation rather than industry-wide panic.

Liquidity contraction in the leading stablecoin often affects order book depth across exchanges. Lower issuance can reduce immediate buying power for risk assets. However, steady growth in alternative stablecoins indicated that capital stayed within the ecosystem, though redistributed.

The mixed signals complicated interpretation. A shrinking USDT supply typically correlates with reduced speculative activity. Yet rising aggregate stablecoin capitalization pointed to selective allocation rather than capital flight.

Short-term liquidity conditions now hinge on whether redemptions persist into early March. If supply contraction slows, stablecoin rotation may stabilize market depth across major exchanges. Continued declines, however, could tighten funding rates and reduce leverage appetite in the coming weeks.

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