In a year full of uncertainty in the cryptocurrency space, a new trend is emerging: stablecoin outflows have continued for 18 consecutive months, and the market dominance of stablecoins has dropped to 11.6%.
According to a CCData report, the total market value of the stablecoin industry in July was US$124 billion, falling for 18 consecutive months, affecting most major stablecoins. While Pax Dollar (USDP), USD Coin (USDC) and Binance USD (BUSD) all fell, Tether (USDT), the largest stablecoin by market capitalization, continued to grow.
Stablecoins are a class of cryptocurrencies that attempt to maintain price stability through various methods. Most leading stablecoins are backed by fiat currencies, although others are backed by cryptocurrencies or commodities, or are based on algorithms.
The reasons behind the recent exodus are not entirely clear and may be multifactorial.
Binance.US suspended fiat currency deposits following a lawsuit filed by the SEC, while MakerDAO removed USDP from its reserves after failing to generate additional revenue, impacting the industry.
According to CCData’s report, stablecoin trading volume increased by 10.9% in August, reaching $406 billion, but activity on centralized exchanges has struggled, and overall trading volume is “expected” to continue to decline in September.
CCData’s report points to the SEC’s lawsuit against leading cryptocurrency exchanges Binance and Coinbase and the race to list a spot Bitcoin (BTC) exchange-traded fund (ETF) as factors leading to increased stablecoin trading volume.
These factors suggest that stablecoins remain a safe haven for investors, meaning outflows may be related to other factors, such as investors cashing out stablecoins to buy traditional assets as they exit the crypto space, or taking advantage of rising fixed asset yields . Income Securities.
For example, the yield on the 10-year Treasury note has been soaring as the Federal Reserve raises interest rates to curb inflation. While the yield on these notes fell below 0.4% in 2020, it currently stands at 4.25%.
Kadan Stadelmann, chief technology officer of blockchain platform Komodo, told Cointelegraph that one of the reasons why investors buy government bonds is that “there is greater certainty behind them.” Although “governments like the United States may face serious debt problems, the vast majority of people still believe that they are stable.” Stadelman added:
“At the same time, stablecoins are considered riskier because the crypto market remains largely unregulated. Additionally, returns on stablecoins are not fully guaranteed. This means that if the interest rates between the two options are comparable , investors are more likely to choose treasury bonds over stablecoins.”
Digging deeper, the stablecoin industry’s decline in market capitalization could have a significant impact on the broader cryptocurrency market. Stablecoins are often used as a medium of exchange and store of value in cryptocurrency transactions, which means that if demand for stablecoins decreases, it could reduce the liquidity and efficiency of the entire cryptocurrency market.
The circulating supply of stablecoins has shown explosive growth in the long term
While the stablecoin industry’s total market capitalization has declined for 16 consecutive months, CCData’s report details that trading volume has not suffered the same fate.
Becky Sarwate, head of communications at cryptocurrency trading platform CEX.IO, pointed out in an interview with Cointelegraph that some changes in the stablecoin space, including USDT’s rise and slight decline in August, have historical precedents and indicate increased demand.
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Sarwate noted that some projects have “experienced significant volatility this year,” such as the decoupling of USDC after Circle had $3.3 billion trapped in the financial institution following the collapse of Silicon Valley Bank in March. She said this “could set the stage for Binance to shift its stablecoin holdings towards Bitcoin and Ethereum.” Sarvat added:
“Meanwhile, USDC’s ubiquity in the DeFi space has long pushed other stablecoins such as Dai to the periphery due to its excessive collateralization requirements.”
She also noted that Binance’s flagship stablecoin, BUSD, continued to fall after Paxos was forced to stop issuing new tokens. Binance has since adopted TrueUSD (TUSD) and First Digital USD (FDUSD), “which have seen their market cap grow by approximately 240% and 1,950% respectively in 2023.”
Thomas Perfumo, head of strategy at cryptocurrency exchange Kraken, told Cointelegraph that the market cap of stablecoins “corresponds to market demand,” adding:
“Over the past three and a half years, the supply of stablecoins in circulation has grown from approximately $5 billion to approximately $115 billion, demonstrating the attractiveness of stablecoins given the appeal of hedging against volatility and the flexibility of 24/7 global transferability. There has been a huge increase in the supply of coins.”
Peli Wang, co-founder and chief operating officer of decentralized finance options exchange Bracket Labs, pointed out that from June 2022 to September 2023, the market value of the leading stablecoins USDT and USDC fell by 23%, while in September 2023 The market value fell by 66% in March. From November 2021 to September 2023, the cryptocurrency space suffered losses of approximately $3 trillion to $1 trillion.
To Wang, many cryptocurrency investors are “highly opportunistic in that they follow trends in yields.” They took advantage of better yield opportunities in cryptocurrencies when interest rates were lower, and now with interest rates rising, they are switching to traditional finance.
Wang is not alone in this analysis: Kraken’s Perfumo told Cointelegraph that “the decline in stablecoin supply may be related to the appeal of other cash equivalents that earn higher interest, including government bonds.”
Perfumo added that the Federal Deposit Insurance Corporation reported that U.S. banks were losing more deposits “than at any time in the past four decades” as yields rose, presumably as funds were moved to higher-yielding Treasuries or money market funds .
Pegah Soltani, head of payments products at fintech company Ripple, told Cointelegraph that back in 2020, when interest rates in traditional finance were low, “the opportunity cost of holding a non-yielding stablecoin was small because yields on Treasury bonds and other fixed-income securities were lower. high”. Close to 0%. “
Soltani added that as interest rates rise, the appeal of holding stablecoins rather than yield instruments becomes less attractive:
“Now that Treasury prices are up 5%, there is a real cost to holding stablecoin assets compared to Treasury bonds. Risk is a more obvious factor, but economic dynamics may play a greater role in market cap highs and lows effect.”
For CEX.IO’s Sarwate, there is “no question” that higher interest rates make traditional finance more attractive to investors seeking fixed income. She added that the adoption of stablecoins was initially about “providing participants interested in cryptocurrencies with easy access to more advanced services in the digital economy.”
Tokenized fiat currency
At some point in 2023, the major stablecoins USDC and USDT decoupled, shaking investor confidence. Coupled with the recent collapse of the cryptocurrency exchange FTX and Terra ecosystems, which included algorithmic stablecoins that lost almost all value, it is clear that the stablecoin market faces serious challenges that are still fresh in the minds of many industry players.
Sarwate concluded that these industry players want to feel secure while seeing their investments grow, meaning that until stablecoins can “meaningfully solve both of these problems, we will likely continue to see this specific use case The performance was mediocre or lackluster.”
On whether the shift to fixed-income securities is temporary or indicative of a longer-term trend, Soltani told Cointelegraph that tokenized assets such as fiat currencies “have greater utility than non-tokenized assets,” especially if issued on a high-performance blockchain :
“Tokenized fiat is the future – whether it is issued by banks, circles, Tether or other institutions, remains to be seen. The move to Treasuries, both in the short and long term, signals economic and regulatory success.”
She added that if stablecoins offer the same yield as Treasury bonds while maintaining compliance, many cryptocurrency users may want to keep their assets in stablecoins because stablecoins are easier to move and trade.
In short, the incentive to hold stablecoins appears to have been declining, while the incentive to hold cash and other fixed-income securities in traditional finance has been increasing.
Can PayPal’s stablecoin turn things around?
In August, global payments giant PayPal launched a new stablecoin called PayPal USD (PYUSD), an Ethereum-based, U.S. dollar-pegged stablecoin issued by Paxos and funded by U.S. dollar deposits, short-term Treasury bonds and Full support is provided in other cash equivalents.
Today, we’re launching a new stablecoin, PayPal USD (PYUSD). It is designed for payments and is backed by highly liquid and secure assets. Starting today and rolling out over the next few weeks, you will be able to buy, sell, hold and transfer PYUSD. Learn more https://t.co/53RRBhmNHx pic.twitter.com/53ur2KmjU7
— PayPal (@PayPal) August 7, 2023
The stablecoin is the first to carry the influence of a major U.S. financial institution, which may increase investor confidence in it. As CEX.IO’s Sarwate points out, others are tired of its centralized nature and have raised concerns about some of its controversial features, including address freezing and fund wiping.
Sarwate added that “many people feel that this kind of overarching control is antithetical to the promise of cryptocurrencies,” which to her could explain why PYUSD has struggled to gain traction so far.
Still, PayPal’s stablecoin could help the industry recover, even by bringing in new users who have never used cryptocurrencies before. Erik Anderson, senior research analyst at ETF company Global X, told Cointelegraph that PYUSD may lower the barrier to entry for cryptocurrencies:
“We believe the launch of PayPal has the potential to make the technology feel more accessible and less intimidating to its large user base (approximately 430+ million active users), which is a good thing for adoption.”
Sarwate seemed to agree with this assessment, saying that the PayPal name behind the stablecoin could “become a selling point for newcomers to the space and help establish PYUSD as a gateway cryptocurrency.”
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Ripple’s Soltani echoed this sentiment, saying that if the stablecoin were listed and available within the broader cryptocurrency ecosystem, while being accepted by merchants that work with Tether, it could “create material inflows into the stablecoin and significantly Change existing market share.”
For Soltani, the stablecoin market will naturally “consolidate to a few trusted names,” otherwise “liquidity will be too fragmented.”
Ultimately, the exodus from stablecoins appears to be caused by a relatively stable cryptocurrency market and investors feeling safe holding on to yield-earning assets during a period of consolidation in the cryptocurrency market.
It remains to be seen whether stablecoins will start to offer income exposure from the fixed income securities that back them, or whether access to and from them will become so seamless and efficient that markets will start to fluctuate wildly.