Title: Could Stablecoins Put an End to Money Market Accounts?
Authors: Juan Leon, Ari Bookman, Bitwise
Compiled by: Luffy, Foresight News
Bitwise's research team publishes a "Crypto Market Commentary" every quarter, analyzing the most important fundamentals and trends affecting the crypto market from a data-driven perspective. The third quarter market commentary was very impressive.
On the one hand, cryptocurrency prices have not shown any signs of recovery, and the market has been consolidating sideways for most of the past six months.
But on the other hand, as Bitwise's Chief Investment Officer Matt Hougan said, "the surface calm masks tremendous progress underneath."
We just want to reveal one aspect of this progress: stablecoins becoming the dominant application of crypto technology.
Why Should Investors Pay Attention to Stablecoins?
Stablecoins are no longer a niche, we've been talking about them for years. Traditional big companies like PayPal are launching their own stablecoins. Top officials in the U.S. House and Senate are discussing stablecoins. Last week, payment processing giant Stripe announced that it is planning to acquire the stablecoin issuing platform Bridge for $1 billion, the largest crypto acquisition in its history.
So what makes stablecoins so valuable? And why should investors pay attention to them?
Unlike other crypto assets, stablecoins are designed to maintain a relatively stable value against some asset, usually the U.S. dollar. If you see the price of a stablecoin fluctuating, something is wrong. This makes them less attractive as an investment target and more as a medium of exchange. More importantly, this role makes stablecoins a bridge between traditional finance and the crypto economy.
Moreover, they are fast, efficient, and programmable. You can send $10,000 to anyone in the world in seconds without worrying about bank business hours or long settlement times. As digital assets, stablecoins can be programmed to execute smart contracts, enabling automated payments, escrow services, and various DeFi applications.
This is why the usage of stablecoins has skyrocketed to record levels. In the first half of this year, over $5.1 trillion in transactions globally were conducted through stablecoins, not far off from Visa's $6.5 trillion.
Stablecoin transactions, source: Bitwise Asset Management, Coin Metrics. Data range from Q1 2020 to Q3 2024. Note: "Others" include BUSD, DAI, FDUSD, GUSD, HUSD, LUSD, PYUSD, TUSD, USDK and USDP.
How Did Stablecoins Take Off?
Why would traditional payment giants like PayPal want to launch stablecoins? The answer is that the business model is too good.
Issuers take in U.S. dollars (or other fiat currencies) and issue an equivalent amount of stablecoins. They then use these fiat currencies to purchase U.S. Treasuries and other yield-generating assets. Finally, they pocket the interest income.
How well does this model work? The largest stablecoin issuer Tether made more profit last year than BlackRock.
These issuers are becoming major players. As shown in the chart below, the total U.S. Treasuries held by the top five stablecoins exceed those held by some G20 countries like South Korea and Germany. Therefore, the growth of stablecoins has provided a new source of demand for U.S. debt and helped provide liquidity to the U.S. Treasury market, which is beneficial to the broader financial system.
Investors are eager to get involved. Tether's biggest competitor Circle is happy to help investors, quietly filing for an IPO this year. Additionally, publicly traded companies like Visa are already planning to integrate stablecoins into their businesses.
Stablecoin holdings of U.S. Treasuries vs. major foreign holders, data from U.S. Treasury and company reports. Data as of June 30, 2024.
What Opportunities Should Investors Look For?
So how should investors capitalize on this opportunity?
Remember: Stablecoins will not appreciate in value, they will bear the same inflationary pressure (and currency conversion risk) as the asset they are pegged to.
So what opportunities should investors look for? What risks should they be wary of?
1) Public Companies
Some multinational companies are integrating stablecoins into their businesses to gain a competitive edge. These companies are reflected in crypto stock indexes like the Bitwise Crypto Innovators 30 Index. As stablecoins offer lower transaction costs and faster settlement times compared to traditional intermediaries, we expect Visa, PayPal, and others won't be the last to embrace stablecoins, with more banks and payment processors likely to enter the space.
2) Potential Alternatives to Money Market Accounts
For most stablecoin holders today, their stablecoins are similar to cash in a checking account: non-interest bearing. But what if issuers could pass on some of the interest they earn from their Treasury reserves as yield?
If this path is opened up, stablecoins could become an attractive alternative to money market funds (a $6.3 trillion industry). For advisors with cash on hand, stablecoins could become a useful tool in their portfolios. With stablecoin regulation being a hot topic in the U.S. Congress, this is worth watching.
3) Value Accrual to Underlying Blockchains
Most stablecoin activity happens on Ethereum. The growth of stablecoins directly drives network growth and indirectly pushes up the price of ETH. Of course, the reverse is also true: if stablecoins fail, it could put pressure on network activity.
Final Thoughts
How big could the stablecoin market get? Consider this:
The total U.S. liquid deposits are around $18 trillion. Stablecoins currently only make up about 1% of that market. If we see large-scale, yield-bearing stablecoins approved or a clearer regulatory framework emerge, what could the market share shift to?
For investors, the signal is clear: now is the time to pay attention to stablecoins.
