• Stablecoins Rule the Top Coins: Why and What Does It Mean?

  • Stablecoins, stablecoins, stablecoins, stablecoins, stablecoins, stablecoins, stablecoins, stablecoin The cryptoverse can’t seem to get enough of them, as their importance to the market was confirmed earlier this summer when Binance USD (BUSD) broke into the top ten cryptoassets by market capitalization. Since then, 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 included three stablecoins, the others being Tether (USDT) and USD Coin (USDC). At the time of writing, the combined value of these three tokens is USD 101.9 billion, and their combined 24-hour volumes consistently outnumber the combined volumes of the remaining top ten cryptoassets.

    This could pose some risks for the market, with analysts speaking to us agreeing that if something (e.g., regulation, legal action) happened to one or more of the three major stablecoins, prices would fall across the board. Most, however, believe that the market will recover from any stablecoin-induced crash and that newer 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 combined 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.

    But why, in the first place, are stablecoins pegged to the US dollar issued?

    “They exist because they are more flexible than fiat currencies and can move on the blockchain, allowing for the near-instant settlement of deposits, withdrawals, and transactions. Moving fiat, on the other hand, is more difficult, and traders would need to use banking services for every deposit and withdrawal,” said Hunain Naseer, senior editor at OKEx Insights.

    Others in the industry concur, with CoinShares’ Christopher Bendiksen telling us that the three major stablecoins have grown 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 rapid settlement. “I believe this is their primary use case: stablecoins can be settled in a matter of hours, whereas regular fiat takes days at most,” he said.

    As a second reason, Bendiksen suggested that stablecoins help people in authoritarian countries gain access to dollars, citing China and Turkey as examples.

    “Third, they enable crypto exchanges to operate without the same risky and costly banking relationships that are normally required,” he added.

    In other words, because so much of the crypto market and ecosystem is unregulated, the demand for stablecoins has increased as the industry has grown.

    More specifically, some commentators attribute the meteoric rise of stablecoins to the major 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 widely known to be an extremely risky asset to invest in, but that hasn’t stopped millions of people from using 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 markets, it’s difficult to avoid using it.”

    Risks that may exist

    Meanwhile, crypto skeptics, such as author David Gerard, continue to argue that market manipulation is to blame for the rapid growth of stablecoins, recalling the never-ending debate 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 or everyone else in the US commercial paper market would have known about Tether’s presence.” They refuse to reveal what it is, implying that if people knew, confidence would suffer,” Gerard said, adding that the other two major stablecoins face similar issues.

    According to Goodman, “Tether is possibly the greatest risk to the health of the crypto market because it is largely backed by volatile 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 sufficiently 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 largest market capitalization, USDT has a significant impact on the market, and regulatory challenges do pose risks.” In the event of a collapse, we could see prices crash all over the place,” Hunain Naseer said.

    According to Christopher Bendiksen, the impact of a collapse or fatal 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 temporary 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 industry 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, argued that they must emerge if the market is to continue growing.

    “New stablecoins will emerge as old ones are forced to cease operations for various reasons. Tether issuance ceased in May for unknown reasons, causing USDC and BUSD issuance to skyrocket,” he said.

    However, more sympathetic observers believe that stablecoins will eventually clean up their act, assuming that regulation is enacted that limits their worst effects while allowing for legitimate use cases.

    “As a general trend, I believe increased regulation acts as an evolutionary selective pressure on cryptoassets, favoring increasingly robust 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 call for regulators to “act quickly” on stablecoins could be beneficial to the sector as a whole.

    He concluded, “If done correctly, it may actually encourage their use.” Regulators must fine-tune their response so that they do not suffocate innovation.”

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