The virtual currency landscape is currently buzzing as most cryptocurrencies enjoy considerable appreciation this year, outshining the usually steady market of stablecoins.
The growing appeal of these digital assets is leading to a striking phenomenon – a contraction in the stablecoin market, despite the generally bullish trend in the cryptocurrency sector.
Stablecoins: A sinking island in a rising tide
Traders typically employ stablecoins as a safe conduit to enter or exit cryptocurrency markets, shift capital between exchanges, and find a safe haven during periods of significant market volatility.
In general, the market capitalization of these tokens tends to rise during rallies and descend during downturns.
However, 2023 has bucked this trend. Despite the crypto market growing approximately 50% to a staggering $1.2 trillion, the stablecoin sector has shrunk close to 8%, hitting a two-year low of around $127 billion, as per CCData research.
This divergence could be attributed to a myriad of reasons. Investors may be favoring high-flying market leaders such as Bitcoin and Ether over stablecoins, seeking greater returns, suggests Jacob Joseph, a research analyst at CCData.
Given that stablecoins don’t offer interest and generally strive to maintain a one-to-one ratio with assets like the US dollar, the shift towards more lucrative options is understandable.
The great rotation and rising hurdles
Many in the crypto community are downplaying the stablecoin sector’s shrinkage, referencing the overall decrease in trading volume following the previous year’s market meltdown.
“We are either not in a proper bull market, or we are just in its very early stages,” commented Sidney Powell, CEO of lending marketplace Maple Finance.
Additionally, several individual stablecoin issuers faced unique challenges earlier this year, which likely encouraged some investors to pivot towards other assets.
For instance, Paxos is discontinuing the Binance-branded BUSD token amidst increasing regulatory scrutiny faced by the world’s largest exchange.
Meanwhile, USDC issuer Circle experienced a hiccup when some of its deposits got temporarily stuck in a defunct California bank, although they were eventually returned.
The unstoppable Tether and regulatory focus
Amidst these tumultuous events, Tether — the world’s largest stablecoin — reached its highest-ever market cap in July, now comprising 65.9% of the stablecoin sector, according to CCData.
Simultaneously, lawmakers are revisiting regulatory measures for the US crypto industry, emphasizing consumer protection following several high-profile company failures last year.
Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) recently reintroduced an updated version of their previous year’s bill, now featuring more robust safeguards, including those for stablecoins.
Rising interest rates could also be influencing the stablecoin market, with investors less inclined to store their money in these tokens when more appealing fixed returns are accessible elsewhere.
“The increase in interest rates means those holding stablecoins are almost always forgoing an opportunity to earn interest,” pointed out Garett Jones, chief economist at Bluechip, a firm ranking stablecoins.
He added that the Fed’s move away from a zero-interest-rate policy makes it much costlier to hold substantial wealth in stablecoins.
Bottomline the decline in the stablecoin market appears to be a confluence of shifting investor priorities, individual stablecoin issues, regulatory developments, and changing macroeconomic factors.
As the year progresses, it will be interesting to see if this trend continues or if stablecoins manage to regain their previous momentum.
