Stablecoins are cryptocurrencies that attempt to mirror the price of other assets, such as the US dollar, allowing to hold funds without need to withdraw them from digital wallets. However, stablecoins seem to have become to the cryptocurrency market what money printing has become to the finance market. According to the Btctools website, the total market capitalisation of stablecoins has fallen by 14% year-on-year, the first such decline since their listing began. At the same time, the Federal Reserve (Fed) reduced the amount of M2 money in circulation by a historic 0.7% year-on-year. Does the change in stablecoin market capitalisation affect changes in the overall cryptocurrency market?
What are stablecoins really?
Stablecoins are a type of cryptocurrency that are designed to have a stable value similar to other real assets. They are often used as a vehicle for transactions in the cryptocurrency market, as their stable value could avoid the risks associated with large price fluctuations. They could also be used as a way of storing capital, as their value does not fluctuate significantly in the short term.
By May 2022, stablecoin's capitalisation had risen steadily, reaching a record $181 billion. It was when the listing of TerraUSD, one of the largest stablecoins, collapsed. The price of the major cryptocurrencies immediately plummeted. Bitcoin lost 35% of its value within a week and the stablecoin's capitalisation fell by $23 billion (down more than 12%). Since then, the market value of all stablecoins seems to be continuously declining month-on-month (currently at 2.8% m/m).
Source: Conotoxia MT5, BTCUSD, Weekly
What does less digital currency mean for the market?
According to the Stablecoin Printer's Twitter profile, which tracks the number of new digital currencies generated, virtually no new tokens were issued among the top 4 stablecoins in December 2022. This is the first such month in history. A shrinking base of virtual money in the system could mean the same thing as central bank money printing for the financial system. A lack of new cash to spend could lead to a shortage of something to spend on new investments. This could lead to a weakened market.
The first sign of a change in trend could be a month-on-month increase in the value of the stablecoin market. However, it seems hard to count on such a move in the current market conditions.
Grzegorz Dróżdż, Junior Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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