Bitcoin is up more than 75% this year, but the market capitalization for stablecoins has dwindled in the same period. The market cap for the dollar-backed USD Coin (USDC) has dropped about 41% since Jan. 1, while Binance USD (BUSD) has fallen 78% in the same period, according to CryptoQuant. Stablecoins are cryptocurrencies whose prices are pegged to an underlying asset. It’s typically a fiat currency – usually the U.S. dollar – although there are also stablecoins whose prices are pegged to commodities or other financial assets. CryptoQuant’s data focuses on dollar-backed stablecoins. “This is unusual as often the market capitalization of stablecoin increases during rallies and decreases during downturns, matching the trend of the overall crypto market,” JPMorgan analyst Steven Alexopoulos said in a note Thursday. “An explanation for the decline of the stablecoin market may be due to investors preferring the higher returns of bitcoin and Ethereum or even traditional assets (benefiting from a rise in interest rates).” Meanwhile, Tether (USDT) seems to be bucking the trend. This stablecoin grew its market capitalization by 26.5% this year. In July, it hit an all-time high of $83.8 billion and now accounts for 68.5% of the overall stablecoin market. Drivers of falling market cap There are some clear reasons for the overall declines. Stablecoins are designed to be less volatile than most virtual currencies, but even they weren’t immune from this year’s regulatory crackdown on crypto — and earlier in the year, the banking crisis. In February, New York state regulators ordered crypto firm Paxos to stop minting new BUSD tokens. A month later, USDC got caught up in the Silicon Valley Bank panic and briefly broke its peg to the U.S. dollar after its issuer, Circle, said it had $3.3 billion of its cash reserve at SVB. “It had dropped pretty substantially, but then they ended up getting their collateral back right, so they were whole,” Steven Lubka, managing director of Swan Bitcoin’s Private Client Services for high-net worth investors, said of USDC. “People expected that once that was plugged, they’d be stabilized. That’s not what happened, it has just kept declining ever since.” That could in part be due to a shift out of U.S.-based stablecoins as pressure on the crypto industry from regulators intensifies, according to David Wells, CEO of Enclave Markets. Since the stablecoin crackdown in the winter, the Securities and Exchange Commission has also sued Coinbase and Binance , two of the biggest exchanges in the world, for violating securities laws. “With other jurisdictions having a more favorable stance towards crypto, some market participants are likely favoring non-U.S. based platforms and products, including stablecoins,” like Tether, he said. Decreased liquidity across all order books in crypto is another key trend in the market this year, he added. “This is related to reduced activity by some larger market makers. Regardless of price direction, reduced liquidity leads to lower demand for stablecoins, especially on non-fiat exchanges,” he said. Investors generally look for the supply of stablecoins to grow when the market is rising as a positive sign of capital entering, which tends to support prices. However, there are multiple ways to read this market, Lubka said. Tether’s prominence Instead of focusing on declines in USDC, investors could point to Tether’s growth as evidence of stablecoin inflows, for example. Investors may also be pulling funds from stablecoins and buying bitcoin. The price of the flagship crypto has been stuck for weeks, but investors are upbeat about various regulatory catalysts ahead of its halving in spring 2024. “You have to make a judgment call on what the USDC outflows mean. One way of looking at it is it’s unrelated and all you need to pay attention to is Tether,” Lubka said. On the other hand, “you could say it matters that stablecoins are going down,” he added. “There’s not a right answer: Different people are going to see that in different ways. It’s hard to draw a firm conclusion there.” — CNBC’s Michael Bloom contributed reporting.
