Understanding Stablecoins Recent Hype
The year so far has been a very chaotic period for financial markets, driven by fear, volatility and negative sentiment across the world. Luckily, since the beginning of April, we are starting to see positive news for the markets as a whole. It seems that there is more confidence from investors as we can see relevant gains for all the major cryptocurrencies. For today’s article, the idea is to better understand stablecoins and what are the metrics driving their development as relevant players in the crypto market.
A stablecoin is a class of cryptocurrency that attempts to offer price stability by being backed by a reserve asset (mainly USD so far). Tether the most relevant stablecoin was launched back in 2014 and was known as RealCoin. Although, it was until 2018 when stablecoins emerged with exciting promises of being used to improve financial access, cross-border payments and remittances.
So far, they have been primarily used to go to Risk-Off Mode and protect or hedge the trading activity from the high volatility of the crypto market as they can easily be held or moved around within the digital ecosystem, between exchanges, wallets, and lenders.
As can be seen below in data from The Economist Intelligence Unit, stablecoins are surging in popularity around the world, and this time much of the demand is for payments in normal business transactions, not just to move money quickly between cryptocurrency exchanges.
Recently, there has been significant global demand for digital dollars. In the past month, the outstanding value of the top six stablecoins pegged to $USD has surged by more than 25% to about $8 billion. In some cases, stablecoins even trade higher than its proposed $1 value, which can be seen as an indication of the accumulation of digital cash.
For example, according to Jeremy Allaire from Circle, they have seen explosive interest and growth in USDC over the past several weeks. New signups have come from e-commerce marketplaces, advertising networks, luxury goods producers, recruiting platforms, digital content markets, peer-to-peer lending platforms, payment companies, software firms, professional services firms, rewards businesses, mobile banking providers and other internet companies.
The global crisis brought on by COVID-19 is an opportunity for stablecoins to deliver on these promises and use cases, especially as governments try to deliver stimulus money quickly to large populations that desperately need it.
Discussions of Central Bank Digital Currencies known as CBDC projects are popping up across the globe. This process involves making a large number of complex economic, technical, and policy decisions. China is likely at the forefront with its digital yuan. England, France, Lithuania, the European Central Bank, and Canada are among several exploring CBDCs.
Facebook also has a strong impact on the interest of stablecoins with its Libra project, a digital token that could be used for payments between the social network’s global users. Initially, the token was designed to be backed by a basket of government currencies, but last week the consortium behind Libra said it now plans to issue stablecoins representing individual currencies, such as the US dollar.
Currently, Tether (USDT) is the most important stablecoin in the market. It is relevant to note that it has a market capitalization of $6,4 Billion dollars with a strong daily trading volume ranking them as number 6 of most relevant crypto-assets. I want to go deeper into the analysis of its performance using a data-driven approach leveraging the IntoTheBlock platform which combines hundreds of factors to extract unique insights about any asset.
IntoTheBlock defines “Large Transactions” as transactions greater than $100k USD. Using this indicator, it can be seen how during a bear market, investors use stablecoins to protect their assets against price volatility. Large Transactions reached a 7-Day high mark of 1.12 Billion USD on April 14th.
The health of the Network can be measured by the Number of Daily Active Addresses. During the past month, this number has been steadily increasing towards reaching the level of 80k Daily Active Addresses.
Metrics revealed by IntoTheBlock´s East-West analysis show that Tether is a globally traded asset, but with a higher predominance from Asia (57.08% of transactions) where adoption seems to be faster.
Finally, it is interesting to see how Tether is being used as a store of value as the demand for USD is increasing worldwide. The “Ownership by Time Held” analysis segments addresses based on their average holding periods. Below, we can see how the Hodlers indicator that covers the number of long term holders (those that hold longer than 1 year) has been steadily increasing on a monthly basis during the past year. It is safe to say that there is a long term trend of Hodling USDT as the average time that Tether is held is 1.3 years.
Will stablecoins overtake the banking dollar because of the lower costs, 24 x 7 instant transfers, and reduced regulatory environment? Time will tell….
In the meantime, as stablecoins continue their evolution within the crypto market, some of these indicators show different views and perspectives to better understand and analyze these assets.