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 third quarter market commentary was very impressive.
On the one hand, cryptocurrency prices have not picked up at all, and the market has been consolidating sideways for most of the past six months.
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.
In addition, 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 decentralized finance (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.
How did stablecoins take off?
Why would traditional payment giants like PayPal want to launch stablecoins? The answer is that this business model is too good.
Issuers collect 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 effective is this model? The profits of the largest stablecoin issuer Tether last year exceeded those of 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 of 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. In addition, publicly traded companies like Visa are already planning to integrate stablecoins into their businesses.
What opportunities should investors seize?
So how should investors seize 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 than traditional intermediaries, we expect companies like Visa and PayPal won't be the last to adopt stablecoins, and more banks and payment processors are likely to enter this 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, 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. This is worth watching as stablecoin regulation is a hot topic in the U.S. Congress.
3) Value accrual to the 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 about $18 trillion. Stablecoins currently only account for about 1% of this market. What if we see large-scale interest-bearing stablecoins approved or a clearer regulatory framework emerge? How would the market share change then?
For investors, the signal is clear: now is the time to focus on stablecoins.
Welcome to join the official BlockBeats community:
Telegram subscription group: https://t.me/theblockbeats
Telegram discussion group: https://t.me/BlockBeats_App
Twitter official account: https://twitter.com/BlockBeatsAsia
