Crypto Liquidity Experiences Massive Exodus: Tether Stablecoin Shrinks Drastically as USD1 Jumps

The cryptocurrency market is facing serious structural pressures beyond the dominant Bitcoin price fluctuations in the news. The clearest warning signs come from the stablecoin sector, which should be the backbone of market liquidity but is instead showing worrying signs of weakness. While large institutions and individual traders remain focused on Bitcoin movements, significant capital flows are experiencing a measured exodus from the main stablecoin pairs—an even more troubling signal for long-term market health.

Stablecoins Losing Growth Momentum

The role of stablecoins in the crypto ecosystem cannot be underestimated. These assets serve as an entry bridge for new buyers and leverage foundations for experienced traders. When stablecoin issuance increases, it usually indicates fresh demand and liquidity expansion. Conversely, when stablecoins start contracting or stagnating, it signals potential capital withdrawals—and this has been happening over the past few weeks.

Data from analytics platform DefiLlama shows that the total market capitalization of stablecoins has reached around $307 billion, with very slow growth. There is no strong acceleration in net issuance as one might expect if risk appetite were truly increasing. This contraction is most evident in the two leading categories: USDT Tether and USDC Circle—both experiencing simultaneous shrinkage.

In the past month, USDT has decreased by about 1.7 percent, while USDC has fallen 0.9 percent, reflecting measured liquidity withdrawals. If these two dominant stablecoins are the main gateways for capital flows, then this shrinkage means less new capital entering the market, order books becoming thinner, and volatility potentially increasing when market shocks occur.

USDT Faces Unexpected Withdrawals, Tether in Liquidity Crisis

Tether’s situation has now reached a critical phase not seen since the FTX collapse in 2022. Analytics from Artemis Analytics reveal that the circulating supply of USDT has dropped by about $1.5 billion so far in February, after a decline of around $1.2 billion in January. This is not just a small correction—it’s a significant exodus of what should be the most stable asset in the market.

USDT Tether is the main trading pair on nearly all decentralized and centralized exchanges, as well as a common collateral source in leveraged trading strategies. When USDT supply contracts this much, the impact spreads like a slow but steady drain across the entire market system. Each reduction in leverage capacity can decrease available liquidity, which in turn increases volatility, prompting more stablecoin redemptions—a feedback loop that can amplify declines.

A report from Jefferies on February 9 estimates that Tether holds about 148 tons of physical gold worth approximately $23 billion, placing it among the largest gold holders in the world. Ironically, while Tether manages large physical assets, the liquidity of USD generated from stablecoins is experiencing a notable contraction. This situation shows that even with strong asset backing, market confidence in stablecoin liquidity remains shaky.

Tight Regulation and Oversight Threaten Trump-Linked USD1 Expansion

While established players like USDT and USDC are losing liquidity, a new contender is attracting attention with explosive yet controversial growth. USD1, a stablecoin linked to entities associated with the Trump family and World Liberty Financial, has grown rapidly with impressive momentum. However, this achievement is now clashing with increasing regulatory pressure.

Democratic members of the House of Representatives have sent a letter to Treasury Secretary Scott Bessent raising concerns about World Liberty Financial’s plans to obtain a banking charter. The lawmakers identify “systemic risk” after reports that a senior family member from the United Arab Emirates acquired significant control over the company with a $500 million investment. Policymakers question whether the $187 million flow into Trump-related entities creates a national security gap or private interests.

Senator Elizabeth Warren explicitly warned Treasury Secretary Scott Bessent and Federal Reserve Chair Jerome Powell about what she called a “taxpayer-funded bailout.” In a letter reported on February 19, Warren indicated that government intervention aimed at stabilizing Bitcoin or large crypto firms could “directly enrich” Trump and his family given their involvement with World Liberty Financial. She urged regulators to avoid using crisis tools in ways that protect already-leveraged interests.

The growth of USD1, which has reached its annual momentum, is now hindered by these regulatory realities. Market data shows that while traditional stablecoins are experiencing liquidity exodus, newer and more controversial projects are facing long-term impacts from tighter oversight. This regulatory pressure adds complexity to an already strained stablecoin ecosystem, which is suffering from broader liquidity withdrawals.

The ongoing stablecoin liquidity crisis indicates that the foundation of the crypto system requires serious attention. As large-scale exodus from major stablecoins coincides with regulatory shifts, market disruptions could reach unprecedented levels. Investors and traders must understand that the challenge is not only from price volatility but also from the liquidity structures supporting the entire ecosystem.