Written by: Juan Leon, Ari Bookman, Bitwise
Compiled by: Luffy, Foresight News
The Bitwise research team publishes the "Crypto Market Commentary" every quarter, analyzing the most important fundamentals and trends affecting the crypto market based on data. The Q3 market commentary is very exciting.
On the one hand, cryptocurrency prices have not improved at all, and the market has been consolidating sideways for most of the past half year.
But on the other hand, as Bitwise Chief Investment Officer Matt Hougan said, "the surface calm masks tremendous progress underneath."
We just want to reveal one aspect of this progress: stablecoins have become 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 plans 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 must be wrong. This reduces their appeal as an investment target, and they are more used 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. Then they use these fiat currencies to purchase U.S. Treasuries and other yield-generating assets. Finally, they pocket the interest income.
How effective is this model? 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 5 stablecoins exceed those held by some G20 countries like South Korea and Germany. So the growth of stablecoins is providing a new source of demand for U.S. debt and helping to 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 won't appreciate, 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 aware 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 jump on the stablecoin bandwagon, 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: they earn no interest. But what if issuers could pass on some of the interest they earn from their Treasury reserves?
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 for clients, stablecoins could become a useful tool in portfolios. This is worth watching as stablecoin regulation is a hot topic in the U.S. Congress.
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 interest-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.
