As legacy markets fall and crypto remains in a standstill, some investors might be moving toward stablecoins in a flight to liquidity. The stablecoin market has surged by $1.5 billion in the last month and is now valued at over $7 billion, according to data by Coin Metrics.
In a thread on the recent rise of stablecoins, Coin Metrics co-founder Nic Carter said it could be related to concerns over “brrr brrr” as the US prints and injects fiat money into markets to stem the fallout of a global economic slowdown.
With the US stock market and crypto market sell-off in recent weeks, where investors moved to less risky assets like cash, might have some investors fled to USD-pegged stablecoins because they’re the closest thing to cash during a liquidity crunch? According to Carter, that’s not the only possible reason. “There is stablecoin creation happening, it's not just crypto risk assets flowing back into stablecoins,” he said via Twitter. “There is some demographic out there converting digital dollars into tokenized fiat.”
Carter further pointed to the growth of stablecoins on Ethereum, as their value circulating on Ethereum has crept up closer to the value of Ether, the cryptocurrency that fuels the blockchain.
When asked about the possible effects of the growth of stablecoins on Ethereum, Carter confirmed to Decrypt that this might mean that if users on the blockchain begin using USD-denominated stablecoins to settle transactions and pay fees, it would diminish the demand for Ether, “which negatively affects the whole system as that reduces miner revenue,” he said.
Why is the effect more pronounced on Ether than Bitcoin? “The difference is bitcoin doesn't have a meaningful presence of stablecoins,” he said. “Tether was previously very big on bitcoin but it has migrated to ETH mostly.”
However, the biggest effect of the economic crisis—and the corresponding stablecoin boom—might be an acceleration in the deployment of central bank digital currencies (CBDCs).
Carter told Decrypt, “A sustained period of direct government handouts to individuals could certainly add to the urgency of creating a CBDC.” However, he said, it might not come soon enough to help with the current pandemic: “I'm not sure a retail-facing CBDC could be turned around quickly enough to be applicable.”
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