Despite an 18-month decline in stablecoin market cap, industry experts remain optimistic about its future resurgence.
The stablecoin market has navigated through a rough 18-month period, culminating in a substantial decrease in its market capitalization. From its peak of $189 billion in May of the previous year, it now stands at $124 billion, marking a 35% decrease. This significant dip results from several challenges, including the downfall of Terraform and its stablecoin UST. Yet, as industry experts weigh in on the current situation, the sentiment remains optimistic, and there’s hope for a rebound.
Analyzing the Decline: External Factors at Play
Several contributing factors have led to this downtrend. One major aspect is the declining retail participation in the stablecoin market. At its zenith in mid-2021, daily trade volumes reached a staggering $150-300 billion. Fast forward to the present, and these numbers have dwindled to an average of $50 billion.
Beyond just participation, the economic environment has influenced the market dynamics significantly. With the US treasury yield making substantial gains since mid-2022 and reduced volatility in the crypto domain, the allure of stablecoins diminishes. When the risk-free yields are hovering around 5%, the opportunity cost for holding stablecoins increases, prompting users to rethink their investments.
Nic Carter from Castle Island Ventures offers a straightforward explanation for this. As traditional finance rates began to surpass those of crypto-native yields in 2022, investors began redirecting their assets from stablecoins back into fiat currency. He believes this trend will continue until traditional finance rates see a reduction, or yields in the crypto realm, especially from platforms like DeFi and Ethereum, begin to rise.
Market Concentration and the Battle of the Giants
Diving deeper into the stablecoin arena, a notable observation is the high concentration of the market cap among a few major players. The five primary stablecoins—USDT, USDC, DAI, TUSD, and BUSD—hold over 95% of the total market value. Among these, USDT stands tall as the dominant player. Despite facing depegging concerns and the fallout from UST’s collapse, its market cap has surged, currently valued at $83 billion. This dominance translates to 67% of the entire stablecoin volume.
Contrastingly, USDC hasn’t fared as well. The stablecoin has hit rock bottom levels in recent years. The reasons for this decline are manifold, including its own depegging amidst the banking chaos experienced in the industry. The divide between USDT and USDC’s performance is attributed to the varying approaches of regulators.
Regulatory Stances Shape the Stablecoin Landscape
Carter, in his address at Token2049 in Singapore, shed light on the regulatory challenges. He highlighted the difference between on-shore (US-native) and off-shore stablecoins. Given the stringent regulatory environment in the U.S., native stablecoins like USDC have faced hurdles, causing their market share to drop. On the other hand, stablecoins outside the U.S., led by USDT, have been thriving.
Despite the challenges, Carter views stablecoins as a significant aspect of the crypto world. They might make up only 10% of the crypto market share, but their role in settlement activity on public blockchains is undeniable, accounting for 70-80% of all transactions.
Vaidya Pallasena of Bluechip holds a promising view for the future. He envisions a potential turnaround driven by renewed interest in crypto trading and investments, paired with steady interest rate cuts. A more accommodating regulatory environment that supports crypto could be the key to unlocking stablecoin’s potential and driving its resurgence.
While the stablecoin market has faced its share of challenges, the underlying belief among experts is that its importance remains intact. With the right catalysts in place, the stablecoin market could very well bounce back, reaffirming its position in the crypto ecosystem.