Stablecoins, cryptocurrencies that are typically tied to real-world assets like the U.S. dollar, are currently experiencing a significant decline in market capitalization. This slump is attributed to subdued trading volumes and a weaker dollar, which are negatively impacting the stablecoin market. While the overall cryptocurrency ecosystem has seen some recovery from its lows in 2022, the stablecoin sector’s market cap is set to decline for the 18th consecutive month, according to research firm CCData. It has shrunk by nearly 10% this year, reaching $124.4 billion as of September 14th.
James Butterfill, the head of research at CoinShares, explained that the demand for stablecoins, particularly those pegged to the U.S. dollar, is closely tied to the appetite for the dollar itself. When the dollar index rose due to interest rate hikes last year, stablecoin volumes also increased significantly. However, not all stablecoins are experiencing the same downward trend. Tether, the largest stablecoin, reached an all-time high of $83.8 billion in July, according to CoinGecko. Although it has slightly dipped to around $82.9 billion, Tether’s value has been supported by its popularity in certain regions, such as emerging markets in Central South America and Central Asia, according to Paolo Ardoino, the chief technology officer of Tether.
While stablecoins represent only a fraction of the overall cryptocurrency market, which is valued at over $1 trillion, they play a crucial role for traders. Stablecoins allow traders to hedge against price fluctuations in other tokens, such as bitcoin, or to store idle cash without converting it back into fiat currency. Some enthusiasts even envision stablecoins being used as a form of payment. However, the stablecoin market has been struggling since the collapse of TerraUSD, an algorithmic token that was once the fourth-largest stablecoin. This collapse triggered a series of dramatic failures for the industry.
Additionally, the market has been impacted by the losses of Binance’s dollar-linked token BUSD, which has declined by approximately 89% from its all-time high in November. In February, the New York Department of Financial Services ordered issuer Paxos to halt the minting of BUSD, which was once the third-largest stablecoin. Although Paxos continues to support BUSD until at least February 2024, Binance is encouraging users to trade their balances for other stablecoins. USD Coin (USDC), the second-largest stablecoin, has also experienced a decline in market capitalization of over 53% since its all-time high in June last year, currently standing at just above $26 billion.
Both Tether and USDC lost their pegs to the U.S. dollar at certain points last year. Tether’s peg was affected when TerraUSD collapsed in May 2022, while USDC’s peg was impacted in March when Silicon Valley Bank, where Circle Internet Financial (the issuer of USDC) held $3.3 billion in cash reserves, encountered difficulties. The failure of SVB, along with other regional banks earlier this year, continues to cause uncertainty in the market, according to Dante Disparte, the chief strategy officer and head of global policy at Circle. However, Disparte emphasized that the company’s success is not solely measured by growth, and he expects to see some corrections in the market as the lingering effects of the banking crisis subside.
