In a year filled with uncertainty in the cryptocurrency space, a new trend has been unraveling: a stablecoin exodus that has now lasted for 18 consecu
In a year filled with uncertainty in the cryptocurrency space, a new trend has been unraveling: a stablecoin exodus that has now lasted for 18 consecutive months and has seen the market dominance of stablecoins drop to 11.6%.
According to a report from CCData, the total market capitalization of the stablecoin sector in July was $124 billion amid a 18-month decline that affected most major stablecoins. While Pax Dollar (USDP), USD Coin (USDC) and Binance USD (BUSD) all saw declines, the largest stablecoin by market cap, Tether (USDT), has kept on growing.
Stablecoins are a class of cryptocurrencies that attempt to maintain price stability through a variety of 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 aren’t entirely clear and could be multifaceted.
The suspension of fiat currency deposits on Binance.US following a lawsuit from the United States Securities and Exchange Commission alongside MakerDAO’s move to drop USDP from its reserves as it failed to accrue additional revenue impacted the sector.
Stablecoin trading volumes rose 10.9% to $406 billion in August, but activity on centralized exchanges is struggling, with overall trading volumes “on track” to continue to decline in September, per the CCData report.
CCData’s report points to the SEC lawsuits against leading cryptocurrency exchanges Binance and Coinbase and the race to list a spot Bitcoin (BTC) exchange-traded fund (ETF) as factors contributing to the increase in stablecoin trading volumes.
These factors suggest stablecoins are still acting as safe havens for investors, meaning the exodus could be related to other factors, such as investors cashing out their stablecoins to buy traditional assets as they exit the cryptocurrency space or to take advantage of rising yields in fixed-income securities.
The yield on 10-year U.S. Treasurys, for example, has been surging as the Federal Reserve raises interest rates in a bid to curb inflation. While the yield on these notes was at one point below 0.4% in 2020, it’s now at 4.25%.
Kadan Stadelmann, chief technology officer of blockchain platform Komodo, told Cointelegraph that one of the reasons investors are buying Treasury bills is the “greater certainty behind them.” Even though governments “like the U.S. might face significant debt trouble, they are still considered to be stable by the vast majority of people.” Stadelmann added:
“Meanwhile, stablecoins are perceived as riskier because the crypto market is still largely unregulated. Additionally, stablecoin returns aren’t fully guaranteed. This means if interest rates are comparable between both options, investors are more likely to choose T-bills over stablecoins.”
Digging deeper, the drop in the market capitalization of the stablecoin sector could significantly influence the broader cryptocurrency market. Stablecoins are often used as a medium of exchange and a store of value in crypto transactions, meaning that if demand for stablecoins decreases, it could reduce the liquidity and efficiency of the crypto market as a whole.
Circulating stablecoin supply exploded long-term
While the total market capitalization of the stablecoin sector has been declining for 16 consecutive months, CCData’s report detailed that trading volumes have not suffered the same fate.
Speaking to Cointelegraph, Becky Sarwate, head of communications at cryptocurrency trading platform CEX.IO, pointed to several changes in the stablecoin sector, including USDT’s rise and a slight drop seen in August, that have historical precedent and demonstrate an increase in demand.
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Sarwate noted that several projects experienced “noticeable fluctuations this year,” with USDC, for example, depegging following the collapse of Silicon Valley Bank in March after it was revealed Circle had $3.3 billion stuck in the financial institution. She said this “likely set the table for Binance to pivot its holdings from the stablecoin into BTC and ETH.” Sarwate added:
“At the same time, USDC’s ubiquity in the DeFi space has long nudged other stablecoins like Dai to the periphery due to its overcollateralization requirements.”
She also pointed out that Binance’s flagship stablecoin, BUSD, has continued declining after Paxos was forced to stop issuing new tokens. Binance has since adopted TrueUSD (TUSD) and First Digital USD (FDUSD), which “both saw increased market capitalization of roughly 240% and 1,950%, respectively, in 2023.”
Thomas Perfumo, head of strategy at cryptocurrency exchange Kraken, told Cointelegraph that the market capitalization for stablecoins “corresponds with market demand,” adding:
“Over the last three-and-a-half years, circulating stablecoin supply has grown from ~$5 billion to ~$115 billion, signaling a massive…
cointelegraph.com
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