Stablecoins Move Past Bitcoin in Value and Volume

While cryptocurrency asset prices remain in the cellar, as compared to their all-time highs in late 2017, a new crypto dawn has risen with “stablecoins.” A novel and newer type of digital token, “stablecoins,” are breathing new life into cryptocurrency markets and reinvigorating the early crypto vision of “decentralized finance” or “DeFi.”

Well before Bitcoin (BTC) was launched in 2009, computer engineers were attempting to create financial instruments controlled by a large decentralized network of computers (and users) – rather than a government or central bank. This endeavor has been known for years across the crypto industry as “decentralized finance” or DeFi.

Bitcoin and Ethereum are the original DeFi applications and are now run by large computer networks, not central authorities. But severe price swings have limited their use across global payment and exchange systems. Instead, some investors have used Bitcoin as a store-of-value investment, like gold, to protect against inflation. Ethereum, on the other hand, has been widely used as crowdfunding currency for tech startups.

The instability and lack of utility of the “native” cryptocurrencies has driven market demand for more stable tokens. Tether (TUSD), the world’s first “stablecoin,” was first launched from Southern California in 2014. Although Tether has seen its share of controversy – it has reached a $10.0 billion market capitalization, as of August 5, 2020. (To calculate market capitalization for a cryptocurrency, you simply multiply the current trading price of the crypto coin by its circulating supply.) Tether has also helped spur the launch of ~60 new competing stablecoins over the last six years.

Today, stablecoins are organized into four major categories: fiat, commodity, crypto, and algorithmic. Fiat stablecoins, like Tether and its widely respected rival, USD Coin (USDC) with a $1.1 billion market capitalization, are the most popular of the four stablecoin flavors. They are backed by country- and government- issued paper currencies, like the U.S. dollar (USD) or the Japanese yen (JPY).

USD stablecoins, like USDC, are tied or pegged to the U.S. dollar at a one-to-one (1:1) ratio, which is called “price parity.” For example, USDC, the world’s second largest USD stablecoin, provides the following benefits to its users:

Backed by $1.00: Centre, the consortium that mints USDC, collectively holds $1.00 in a reserve bank account for every single USDC coin in circulation.
Redeemable at $1.00: USDC tokens are redeemable for $1.00 with the consortium that manages USDC – as long as a customer has a U.S. dollar-denominated bank account.

While USD stablecoins may not have the same extreme volatility of non-pegged currencies, like Bitcoin, they have inherited many of their most powerful properties, like 24-7 accessibility, speed, and cost-efficiency. In addition, USD stablecoins are programmable, which unlocks opportunity to create financial applications, such as “smart contracts” for subscription-based businesses, global lenders, and even migrant workers.

To date, the primary uses for USD stablecoin, like Tether and USD Coin, have been to serve as a method for value transfer between crypto exchanges. With this said, USD stablecoins are now quickly moving up into the classic DeFi areas of foreign exchange (forex) and global payments.

With the rise of Covid-19 in March 2020, has also come a rise in physical barriers to foreign exchange, including quarantines and travel restrictions. This has made it difficult to move cash or U.S. dollars, especially between countries. USD stablecoins are gaining traction, as they have many of the desirable properties of U.S. dollars.

Global investors have been dumping assets and paying dearly to swap local currencies for USD, a historical safe-haven currency. By analyzing “relative value transferred” across the cryptocurrency ecosystem, investors are now piling into USD stablecoins to gain U.S. dollar exposure in a more inexpensive manner, as compared to foreign exchange.

The physical repercussions of Covid-19 quarantines, including international travel restrictions, has also made moving cash difficult for the time being, especially between countries. USD Stablecoins, like Tether, USD Coin, and Dai (DAI), now have many of the desirable properties of U.S. dollars, are being used by some as a substitute.

For the first time, the daily dollar value of transactions processed in USD stablecoins surpassed that of Bitcoin on June 29th. As of now, Tether, on its own, is forecast to surpass Bitcoin’s daily dollar volume before the end of summer 2020. These figures do not include transactions residing on the crytpo exchanges, but they do capture the processing of global payments.

¹Mike Co, “Flight to Stablecoins,” (Coinbase Blog, April 21, 2020).

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