The crypto space has generally been mixed lately, but one sector of the crypto space, the stablecoins industry, has been absolutely proliferating.
Overall, the demand for these fiat-pegged tokens seems to be growing exponentially, and now the total market cap is well over USD 10 billion. This is particularly impressive considering that there was no stablecoin market cap at all until 2014 when Tether launched, so the sector has only been around six years.
First off, here are some stats on the current state of the stablecoin space. Tether is the leader by far with a market cap of USD 9.21 billion, with USD Coin being the second most popular of its type with a market cap of USD 0.73 billion. This is followed by other stablecoins.
Their market cap began to skyrocket like never before in March of this year, and it has continued to surge since then without slowing down.
Coronavirus crisis and global economic crash
The timing of this surge coincides exactly with the beginning of the Coronavirus induced global economic crash. Indeed, the stock markets began to crash in March at the same time the stablecoin surge started.
Therefore, it is quite possible that the recent surge in this sector is connected to the economic fallout of the Coronavirus in some way. There is no way to know the exact mechanism by which the global economic crisis has increased stablecoin usage, but here are some theories.
Weaker fiat currencies and insolvent banks
First off, fiat currencies around the world are weakening, with the local fiat currencies in Lebanon and Venezuela descending into a currency collapse. Also, in general, some banks around the world are going bankrupt. Perhaps stablecoin usage is increasing due to people seeking a safe haven from weakening fiat currencies and insolvent banks.
Easier to trade than fiat currencies
Zooming out, the fundamental reason that stablecoin use has proliferated is that they are easier to use than regular fiat. With regular fiat, it can take days to deposit funds onto an exchange, and days to withdraw funds. This is very inconvenient and makes it practically impossible to conduct professional trading.
Taking the place of fiat currency in crypto space
Thus, stablecoins are taking the place of regular fiat currency in the crypto space, since they automatically increase liquidity, agility, and convenience when trading on exchanges, and the edge that these fiat-pegged tokens provide can make all the difference between losses and profits for people running serious crypto trading operations.
There also also risks when investing into stablecoins. The first risk is the same as with fiat currencies – you have to trust the company, issuing these stablecoins, that it really has the backup for them in gold or USD as it claims to have. Tether was accused several times for failing to provide a proof in form of an audit. And secondly, you have to store them either on an exchange, which is not recommended, or on your own device at your own risk, without any insurance available.
Ultimately, it is likely that the stablecoin surge will continue long term, as more and more crypto users ditch regular fiat and put all of their fiat funds into these unique digital assets.