The cryptoverse can’t seem to get enough of them, as their importance to the market was verified earlier this summer when Binance USD (BUSD) broke into the top ten cryptoassets by market capitalization. Since since, it has been in and out of the club, and it is currently ranked 11th.
In any case, BUSD’s inclusion in the top ten meant that the latter now contained three stablecoins, the others being Tether (USDT) and USD Coin (USDC). At the time of writing, the total value of these three tokens is USD 101.9 billion, and their combined 24-hour volumes frequently outnumber the combined volumes of the remaining top ten cryptoassets.
This could offer some problems for the market, with analysts speaking to Cryptonews.com saying that if something (e.g., regulation, legal action) happened to one or more of the three major stablecoins, values would fall across the board. Most, though, believe that the market will recover from any stablecoin-induced crash, and that more stablecoins will emerge to replace any that fail.
Stablecoins are gaining popularity.
To put this in context, the USDT, USDC, and BUSD were all worth USD 26 billion on January 1. This means that their total capitalization has increased by 292 percent since the beginning of the year, which is comparable to the percentage (270 percent) increase in bitcoin (BTC) price over the last year.
Others in the industry concur, with CoinShares’ Christopher Bendiksen telling Cryptonews.com that the three major stablecoins have gained in popularity for a variety of reasons.
“First and foremost, they are vastly superior to fiat money for cross-exchange arbitrage, which makes them extremely popular with trading desks that require speedy settlement. “I believe this is their core use case: stablecoins can be resolved in a matter of hours, whereas conventional fiat takes days at most,” he stated.
As a second reason, Bendiksen claimed that stablecoins enable citizens in authoritarian countries have access to dollars, citing China and Turkey as examples.
“Third, they enable crypto exchanges to operate without the same dangerous and costly financial links that are ordinarily required,” he continued.
In other words, because so much of the crypto market and ecosystem is unregulated, the demand for stablecoins has increased as the business has grown.
More specifically, some analysts attribute the meteoric ascent of stablecoins to the large crypto exchange Binance.
“The majority of the world’s crypto trading occurs on Binance, with tether serving as the base currency for moving in and out of various cryptos. Tether, of course, is well acknowledged to be an incredibly risky asset to invest in, but that hasn’t stopped millions of individuals from utilizing it, including — on occasion — myself,” said Glen Goodman, an analyst and bestselling author of The Crypto Trader.
According to Goodman, the most liquid and widely traded currency pairs are USDT pairs. “If you want to use the world’s most liquid crypto exchanges, it’s difficult to avoid utilizing it.”
Risks that may exist
Meanwhile, crypto doubters, such as author David Gerard, continue to argue that market manipulation is to blame for the rapid growth of stablecoins, recalling the never-ending discussion over the backing of these tokens. (Learn more: Crypto Industry Participants Reject Reports of Manipulated Bitcoin Rally)
“Tether’s ‘commercial paper’ cannot be US commercial paper, else everyone else in the US commercial paper market would have known about Tether’s presence.” They refuse to divulge what it is, implying that if people understood, confidence would suffer,” Gerard said, adding that the other two major stablecoins face similar challenges.
According to Goodman, “Tether is possibly the greatest risk to the viability of the crypto industry, because it is mostly backed by unpredictable investments.”
“If the stock and crypto markets crashed at the same time (as they did in March 2020), and there was a run on USDT where many people tried to cash in their USDT for dollars at the same time, it is quite possible that there would not be enough asset-backing to pay people $1 for each tether,” he explained.
Assuming that the USDT was not fully backed, Goodman predicts that there would be a panic and the USDT’s value would plummet. As a result, the prices of virtually every major cryptocurrency would plummet.
“As the currency with the greatest market capitalization, USDT has a significant impact on the market, and regulatory problems certainly pose risks.” In the event of a collapse, we may see prices tumble all over the place,” Hunain Naseer remarked.
According to Christopher Bendiksen, the impact of a collapse or deadly regulatory/legal challenge would be severe, but not necessarily long-lasting.
“I’m sure the overall market would suffer if one or more of them failed, but it would only be a brief setback. Bitcoin does not require stablecoins to function, and while the loss of liquidity would be detrimental, he believes it would not pose any existential threats to the sector as a whole.
The future, alternatives, and government regulation
Bendiksen went on to say that decentralized alternatives would eventually emerge to replace any extinct stablecoin. David Gerard, on the other hand, stated that they must emerge if the industry is to continue developing.
“New stablecoins will develop as existing ones are forced to cease operations for various reasons. Tether issuance ceased in May for unclear reasons, causing USDC and BUSD issuance to skyrocket,” he stated.
However, more sympathetic commentators believe that stablecoins will eventually clean up their act, given that regulation is enacted that limits their worst consequences while allowing for legitimate use cases.
“As a general trend, I believe rising regulation functions as an evolutionary selective pressure on cryptoassets, favoring increasingly strong and antifragile solutions to any product that the market desires,” Christopher Bendiksen said.
Similarly, Glen Goodman suggested that US Treasury Secretary Janet Yellen’s recent request for authorities to “act rapidly” on stablecoins could be beneficial to the sector as a whole.
He added, “If done correctly, it may actually stimulate their use.” Regulators must fine-tune their approach so that they do not suffocate innovation.”