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Market Pressure May Break Stablecoins

September 19, 2023

Growing market pressure is piling so much on Stablecoins as it has wilted to their lowest market capitalisation in more than two years which shows that Bitcoin isn’t the only asset experiencing a slump. Stablecoins, cryptocurrencies typically pegged to real-world assets like the US dollar, have wilted to their lowest market capitalization in more than two years, as subdued trading volumes and a weaker dollar weigh on the market for the tokens. In fact, they’re suffering more than most.

While the entire crypto ecosystem has bounced back somewhat from its 2022 lows, the market cap of the stablecoin sector is set to decline for the 18th consecutive month, according to research firm CCData. It has shrunk by almost a tenth this year, standing at US$124.4-billion as of 14 September.

The reason why tether has stickiness among its users is that the entire emerging markets basically run on tether. “A lot of the appetite for stablecoins, because predominantly they are dollar-denominated ones, has to do with appetite for the dollar,” said James Butterfill, head of research at CoinShares. A jump in the dollar index on interest rate hikes last year was accompanied by a big rise in stablecoin volumes, he added.

Yet all is not equal: dollar-pegged tether, the biggest stablecoin, is bucking the losing trend. It hit an all-time high of $83.8-billion in July, according to CoinGecko, after spending the first three months of this year below $80-billion, and has since dipped to around $82.9-billion.

Paolo Ardoino, the chief technology officer of tether, said the coin’s value had been supported by its popularity in certain parts of the world.

“The reason why tether has a stickiness among its users is that the entire emerging markets, the entire central South America and Central Asia, basically run on tether,” he added.

Stablecoins’ key role

While only a fraction of the crypto market, worth more than $1-trillion, stablecoins play a key role for traders, allowing them to hedge against spikes in prices of other tokens, like bitcoin, or to store idle cash without transferring it back into fiat currency. Some enthusiasts also envision stablecoins being used as a form of payment.

But the market for the tokens has languished since last year’s collapse of terraUSD, an algorithmic token that was once the fourth-largest stablecoin, whose downfall was the first domino in a series of dramatic failures for the industry.

The market has also been hit by the losses of Binance’s dollar-linked token BUSD, which is down about 89% from an all-time high hit in November. In February, the New York department of financial services ordered issuer Paxos to stop minting the token, which was once the third-largest stablecoin.

Though Paxos is maintaining support for BUSD through at least February 2024, a Binance spokesman said the company is encouraging users to trade their balances for other stablecoins.

USD coin (USDC), the second-largest stablecoin, has seen its market cap slide more than 53% from the all-time high it hit in June last year, and is now hovering above $26-billion.

Both tether and USDC lost their pegs to the US dollar at points last year: tether when terraUSD collapsed in May 2022, and USDC in March when Silicon Valley Bank — where the token’s issuer Circle Internet Financial held $3.3-billion of its cash reserves — failed.

The failure of SVB — along with other regional banks earlier this year — is still causing uncertainty in the market, said Dante Disparte, chief strategy officer and head of global policy at Circle, although he emphasised that growth is not the company’s only metric of success.

“There has been a sort of temporary de-risking from the US, but it’s not a function of regulatory ambiguity,” he said. “It’s more a function of the lingering effects of the banking crisis, and I think even there, we will start to see some corrections in the market.”

Kelechi Deca

Kelechi Deca has over two decades of media experience, he has traveled to over 77 countries reporting on multilateral development institutions, international business, trade, travels, culture, and diplomacy. He is also a petrol head with in-depth knowledge of automobiles and the auto industry

Tether Tightens Grip Over Unstable World of Stablecoins

February 23, 2023

Alex Miller, CEO at bitcoin developer network Hiro

The world of stablecoins is suddenly looking shaky. Seismic shifts may be afoot in the US$137-billion market after New York-based Paxos Trust Company, which mints Binance’s stablecoin, said it would cease issuing new BUSD tokens after US regulators labelled the asset an unregistered security.

The US move has left investors questioning the future shape of the market for stablecoins, tokens that are usually backed by traditional assets like dollars and US treasuries to tame the wild swings that characterise cryptocurrencies.

The immediate impact hasn’t been negative for the stablecoin market as a whole, though; it’s actually seen its total value grow by $2-billion since the Paxos announcement on 13 February.

There’s way too much demand for dollar-based stablecoins for them to go away

“There’s way too much demand for dollar-based stablecoins for them to go away,” said Alex Miller, CEO at bitcoin developer network Hiro.

Instead rivals are vying to cash in on the woes of BUSD, the world’s third biggest stablecoin, whose market value has shrunk to $12.9-billion from $16.1-billion, with its market share narrowing to 9.4% from 12.1%, according to CoinGecko.com.

Market leader tether (USDT) has been a big beneficiary, adding $1.9-billion to its market capitalisation to hit $70.3-billion since the news. It now commands 52.6% of the stablecoin market, up from just over 51%.

Circle’s USD coin, the second biggest stablecoin, edged up over $700-million to $42-billion, lifting its market share to 31.3% from 30.9%.

‘And tether wins’

Stablecoins are a key part of the cryptosphere, with their steadier value meaning they’re used to facilitate transfers between cryptocurrencies or into regular cash. Traders also use these tokens to hedge their positions, and hence dwindling market value is associated with falling liquidity and leverage in the broader crypto market.

Markus Thielen, head of research and strategy at crypto firm Matrixport, said the Paxos announcement and subsequent slump in BUSD had caused a big shift in the stablecoin market. “And tether wins.”

Broader crypto market impact also seems to have been contained with bitcoin rising 14% over the past week to $24 902, shrugging off worries that central banks will keep raising rates.

Among the reasons for the sanguine reaction is that BUSD is largely used to trade on Binance, the world’s largest crypto trading platform, while its usage is limited in other parts of the crypto world, according to analytics firm Kaiko.

“While BUSD is used in DeFi, it is not systemically important to the ecosystem,” Kaiko’s Riyad Carey said.

The developments around Binance’s stablecoin have also boosted trading on competing platforms; since 1 February, Binance’s bitcoin liquidity is down almost 30% while US-based Coinbase is up nearly 15%, according to Kaiko.

Daily open interest for bitcoin to BUSD perpetual swaps has dropped from over 17 000 bitcoin at the beginning of February to 13 726 bitcoin, Binance data showed, pointing to traders withdrawing bets on future prices for BUSD.

While some uncertainty remains on the impact of the US Securities and Exchange Commission ruling on other stablecoins, the market appears to have adjusted, according to some crypto players.

“This is unlikely to represent a critical large structural change to the market, for now,” said Vetle Lunde, analyst at Arcane Research. He added: “Enforcement against USDC or the non-US domiciled USDT, could have more dramatic implications.”