Stablecoin demand maintains pace as other cryptocurrencies tumble

More investors are swapping cryptocurrencies for stablecoins, signaling a potential shift toward the less risky asset.

Stablecoin dominance is near 16%, about 2.7 percentage points away from an all-time high set in mid-June. (This percentage is determined by how much of the total crypto market capitalization is made up of stablecoins; it is, from one perspective, a bearish indicator the stronger it becomes.)

“Stablecoins have been growing independently of market cycles simply because of their ability to improve financial inclusion,” Paolo Ardoino, chief technology officer of the world’s largest stablecoin by volume, Tether, said to TechCrunch. “Stablecoins are also created based on market supply and demand, so when some crypto prices fall, traders may see this as a buy opportunity to use stablecoin to move in and out of positions.”

The total stablecoin supply peaked in early April around $182.6 billion but has since fallen about 22% to $141.3 billion as of October 18, data from The Block shows.

Even with that said, stablecoins have expanded in volume vastly over the years, and will continue to grow as the crypto market develops, Ardoino added.

“Stablecoins are able to make the economy much more efficient by bringing digital dollars to the real world, putting U.S. dollars on a blockchain, attracting liquidity to the currency and allowing it to increase its dominance.”

Stablecoins have proven to be “fairly sticky and more sticky” than other sectors of crypto assets, Joao Reginatto, VP of product at Circle, said to TechCrunch. “Over the last 12 to 18 months, there has been a huge amount of growth in crypto but also a correction.”

Circle co-founded the USD Coin (USDC) alongside crypto exchange Coinbase in September 2018. USDC is pegged to the U.S. dollar at a 1:1 ratio. Since its launch, it has climbed to become the second-largest stablecoin and fourth-largest cryptocurrency by market capitalization.

Over the past 12 months, retail wallet addresses on-chain, holding $10,000 equivalent of USDC or less, grew regardless of market conditions, Reginatto shared. “[Those wallets] haven’t been influenced by the bear market.”

But when you look at large crypto wallets from institutions or high-net-worth individuals — which hold tens of millions of dollars worth of USDC or sometimes hundreds of millions of dollars of USDC — those have corrected more in line with the market, Reginatto added.

“When people look under the hood and see a share of wallets that hold a small amount of USDC continues to grow, not in line with the market contracting, I think that’s a strong indication that we’re entering a new phase for crypto,” Reginatto said.

The total global crypto market cap is down from a month-to-date high of about $972 billion on October 5 to $925 billion as of today, according to CoinMarketCap. During the same time period, the total circulating supply of stablecoins has remained nearly constant.

“Of course markets are cyclical and what we are seeing is the impact of macroeconomic policies that are now unwinding,” Ardoino said. “Markets have been shaken by many events and it will have an impact on stablecoin regulations, but as an industry, we have to prioritize the importance of regulation and consumer protection.”

There could be a number of factors that contribute to the rise in stablecoin dominance, but because the use cases of stablecoins are constantly growing despite the turbulent market, it is difficult to determine a singular cause for its rise, Mayur Kamat, head of product at Binance, said to TechCrunch.

“It could be due to the challenges observed in the global macroeconomic environment, where participants undertake a risk-off sentiment to protect their investment portfolio,” Kamat said. “USD has been very strong lately, so it makes sense that USD-based stablecoins are also seeing growth.”

Reginatto agreed — the stablecoin dominance could be a part of a macroeconomic play. “From a macro standpoint, interest rates in the U.S. have risen quite dramatically and quite fast, and I think the dollar has become like a black hole for liquidity. It’s sucking liquidity out of every asset class you can imagine.”

Similar to what is transpiring with equities, stock exchanges and crypto exchanges worldwide are contracting as well as investors want to get out of volatile assets, Reginatto said. “But some are turning to stablecoins because they can get about 3% yield on annual returns.”

Right now, the market is in a transition period as it shifts away from a speculative phase toward something greater, Reginatto said.

“While some legitimate concerns and questions remain around the future of crypto, one thing is clear,” Ardoino said. “Stablecoins are not only the present but also the future.”