Over the past eighteen months, the stablecoin market has experienced a significant downturn, with a 35% decrease in its total market capitalization. This decline comes in the wake of last year’s collapse of Terraform and its native UST. According to data from DeFiLlama, the market reached its peak at $189 billion in May of the previous year but has since dwindled to $124 billion as of the latest data. Vaidya Pallasena, co-founder of Bluechip, a nonprofit organization focused on evaluating the safety of stablecoins, attributes this decline to several factors.
Analysts blame retail presence in the stablecoin market
One key factor is the reduced retail participation in the market compared to its peak in mid-2021. Daily trade volumes have also decreased significantly, averaging $50 billion, whereas in 2021, they ranged from $150 billion to $300 billion. Pallasena also points out that since mid-2022, U.S. treasury yields have been on the rise, and the crypto market has experienced relatively low volatility. Combining these factors with the opportunity cost of holding them when risk-free yields are around 5% has contributed to the ongoing decline in stablecoin values.
Nic Carter, a partner at Castle Island Ventures, identifies a fundamental driving factor behind the drop in stablecoin values: traditional finance rates surpassing crypto-native yields. He notes that when this crossover occurred in 2022, investors began selling them for fiat currencies. Carter believes that the stablecoin selloff is unlikely to subside until traditional finance rates, specifically three-month treasuries, decrease, or crypto yields increase through DeFi or Ethereum staking.
Furthermore, the market is highly concentrated, with only a handful of assets, including USDT, USDC, DAI, TUSD, and BUSD, making up over 95% of the entire market capitalization. Interestingly, USDT has proven to be the most resilient stablecoin despite concerns about its pegging. While it did experience a significant loss of interest following UST’s collapse, it has since recovered and currently boasts an $83 billion market capitalization, slightly higher than its value in May 2022. USDT remains the dominant player in the stablecoin sector, with 67% of all trading volume flowing through its platform.
Regulatory pressure and resilience in the crypto market
In contrast, USDC, the second-largest of the group, has seen a decline to multi-year lows, despite its parent company, Circle, expanding its presence. Several factors have contributed to the decreased interest in USDC, including its depegging amidst the banking challenges faced by the industry earlier this year. The disparity between USDT and USDC can be attributed to what Nic Carter calls “on-shore and off-shore stablecoins.” He points out that the hostility of U.S. regulators and their efforts to curb the market has led to a significant decline in the market share of U.S.-native stablecoins like USDC.
The primary beneficiaries of this situation are the assets based outside the United States, with USDT leading the way. Carter views these non-U.S.-based stablecoins as “crypto’s killer app” and highlights that stablecoins while constituting only 10% of the total crypto market share, account for 70-80% of all settlement activity on public blockchains. This phenomenon underscores the significance and product-market fit of stablecoins in the crypto ecosystem, even during a bear market. The stablecoin market has faced challenges and a significant decline in market capitalization over the past eighteen months.
Factors such as reduced retail participation, rising U.S. treasury yields, and the concentration of assets among a few assets have contributed to this decline. USDT has managed to remain resilient, while USDC has struggled. The divergence between these two stablecoins is partially driven by regulatory pressures on U.S.-native stablecoins. Despite these challenges, they continue to play a pivotal role in the crypto industry, facilitating a substantial portion of settlement activity on blockchain networks. The stability and utility of the assets remain essential, even amid market fluctuations.
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