Stablecoin Turmoil: An Analysis of 18 Months in the Crypto Sphere

Updated: 08 October 2023

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Over the past one and a half years, the stablecoin market has experienced a tumultuous ride. Following the downfall of Terraform and its associated stablecoin UST, the market cap of these digital currencies has witnessed a substantial 35% reduction. Data from DeFiLlama reveals that from a high of $189 billion in May of the previous year, the figures now hover around $124 billion.

Vaidya Pallasena, a principal at Bluechip, an organization that delves into the safety of stablecoins, shed some light on the reasons behind this downturn. He mentioned that the present retail participation is merely a shadow of its zenith in mid-2021. He added that daily trading volumes once oscillated between $150 billion and $300 billion but have now decreased to around $50 billion.

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We rate stablecoins from F (fail) to A+ (highly stable) based on our SMIDGE rating framework.

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Furthermore, Pallasena emphasized the surge in the US treasury yield since the middle of 2022 and the relative steadiness in the crypto domain. With risk-free yields hovering close to 5% and the costs linked to holding stablecoins, the market has been under pressure.

Drawing attention to stablecoin yields on platforms like the Kucoin exchange, it’s evident that they usually fall below the 5% threshold. Castle Island Ventures’ Nic Carter attributed the decline to traditional financial rates surpassing those in the crypto space. He remarked, “When traditional rates surpassed crypto yields in 2022, there was a noticeable shift from stablecoins back to fiat.”

Considering future trends, Carter doesn’t foresee the sell-off halting unless either traditional financial rates dip, or DeFi or Ethereum staking yields ascend.

The market, as it stands, is monopolized by a few stalwarts. Notably, USDT has exhibited commendable resilience, despite challenges. Its market cap is a robust $83 billion, marking a slight growth since May 2022. It stands as a giant, accounting for 67% of the total stablecoin volume.

An additional worry during the periods of instability is the redemption fee Tether charges. Currently, when users opt for fiat withdrawals over $1,000 directly from Tether, they are charged a 0.1% fee, effectively valuing USDT at $0.99. Additionally, there’s a whopping $100,000 minimum for fiat withdrawals or deposits. On top of this, a non-refundable $150 is charged for “verification” – a step Tether says ensures only genuine applicants proceed. Whereas these fees are there for a reason, and they discourage too many redemption, they are being seen by many as unnecessary and they contribute the diminish trust in the stability of the coin.

Circle Worries

In contrast with Tether, USDC hasn’t been as fortunate. It’s undergone significant setbacks, with its value hitting rock bottom in recent years. This is in stark contrast to the expansive strides taken by its founding firm, Circle. Factors like its own depeg amidst industry banking chaos have contributed to its decline.

Carter, during his speech at Token2049 in Singapore, highlighted the key difference between on-shore and off-shore stablecoins. The pushback from U.S. regulatory bodies has caused native U.S. stablecoins, such as USDC, to lose market traction, with non-U.S. counterparts, led by USDT, filling the void.

Crypto’s killer app

In Carter’s eyes, these stablecoins, accounting for a mere 10% of the crypto market but constituting up to 80% of all public blockchain settlements, are the “killer app” for crypto. Their significance is evident, especially during bear markets.

Concluding on a note of optimism, Pallasena anticipates a shift in the tide, pinning hopes on increased crypto interest and consistent interest rate reductions. A supportive regulatory framework could be the game-changer the market needs.