Stablecoin market cap has been declining for 18 months; why are investors fleeing crypto ‘safe haven’?

Stablecoins have always been a safe haven for investors who are not willing to risk the volatility and wild price fluctuations of crypto assets. 

These cryptocurrencies, usually pegged to real-life assets to maintain certain price levels, played this role for a long time as they enjoyed widespread adoption and market dominance.

However, recent trends have shown that all might not be well in the sector as one would expect. According to a new report from CCData, there has been a trend that one could describe as the stablecoin exodus. 

Per the report, Stablecoins have seen an 18-month decline in market cap. In simpler terms, investors are moving away from what is considered a safe haven.

For the uninitiated, stablecoins are a type of cryptocurrency designed to have a stable value relative to a specific asset or a basket of assets, typically a fiat currency such as the US dollar, Nigerian naira, euro or Japanese yen. 

They are designed to offer a “stable” store of value and medium of exchange compared with more traditional cryptocurrencies like Bitcoin, which can be highly volatile. Fiat money, cryptocurrencies, and commodities like gold and silver are examples of assets used to collateralise or “back” stable assets.

The leading stablecoins in the space include the Tether-issued $USDT, Circle-issued $USDC, the soon-to-be-delisted Binance’s $BUSD, $DAI and the defunct Terra’s $UST. 

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In a year filled with uncertainty in the cryptocurrency ecosystem, the reason why investors are moving could be multifaceted and not exactly clear. 

More on the CCData report

The report reveals that the market capitalisation of stablecoins fell to $124 billion in September, its lowest level since August 2021. This is an indication that there has been a consistent decline in the amount of circulating money, in the last 18 months.

Also, the report says the class of digital assets saw a decline of market dominance to 11.6%, on September 18. Per the report, the major stablecoins affected by this decrease are Binance’s BUSD, Pax Dollar USDP and Circle’s USDC.

With this trend, it could be said that the assets, which are often a gateway between traditional finance and crypto, may be growing less popular as investors favour less risky investments. 

What could be the cause of this decline?

The broader crypto market has faced a series of upsets in the past year and this might have contributed to the upheavals in the stablecoin sector.

Apart from the fact that Terra’s UST, the ‘decentralised stablecoin’ crashed to virtually zero last May, with investors losing billions of dollars to the debacle, there have also been other issues with major stablecoins this year.

USDC, depegged for a while following the shutdown of Silicon Valley Bank in March. Also, Binance’s BUSD has continued declining after Paxos was forced to stop issuing new tokens. 

These and many other unfavourable trends have somehow eroded trust between investors and stablecoins. Also, there is a school of thought that there are now better yield opportunities in the traditional finance industry. So, after taking advantage of better yield opportunities in crypto when traditional finance had low-interest rates, crypto investors are now moving to traditional finance as its rates have increased.

Effects of stablecoin decline

The drop in the market capitalisation of the stablecoin sector could significantly influence the broader cryptocurrency market. 

Note that they are often used as a medium of exchange and a store of value in crypto transactions, meaning that if demand for stablecoins decreases, it could reduce the liquidity and efficiency of the crypto market as a whole.

In August, global payments giant PayPal unveiled a new stablecoin called PayPal USD, an Ethereum-based, dollar-pegged stablecoin issued by Paxos and backed by dollar deposits and other cash equivalents.

Although we wrote a report that exposes how PYUSD doesn’t offer anything different, the stablecoin is the first one carrying the weight of a major U.S. financial institution, which could potentially boost investors’ confidence in it. 

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PYUSD has struggled to gain traction so far. It could nevertheless help the sector recover, even if by bringing in new users who had never used cryptocurrency before.