Stablecoins Surge in Market Share Amid Crypto Market Crumble

Data & Research / 21.03.2020

Crypto stablecoins present an efficient and easy way of managing crypto volatility. Volatility in the crypto market is often regarded as the boon and bane of crypto trading. While on the one hand, it allows traders to accumulate substantial profits, it can cause significant losses to crypto traders or even lead to missing a perfect opportunity to trade. Stablecoins function to cushion investors from intense volatility witnessed in the crypto market by providing a less volatile means to employ in their daily trading as an alternative to fiat currency. Stablecoins substantially reduce volatility by firmly holding their value for more extended periods. 

In recent months, following the outbreak of coronavirus(COVID-19) in Wuhan, China, and its spread throughout the world being declared a pandemic by the WHO, the crypto markets have crushed with a significant decrease in value. Nonetheless, amidst the COVID-19 crisis and the crash of Bitcoin and cryptocurrency markets, stablecoins seemed to have used the opportunity to gain market share and increase their footprints in the heavily competitive crypto space. This guide will highlight how stablecoins have gained increased market share amid the crypto crumble

What is Stablecoin?

Stablecoin refers to a type of cryptocurrency non-volatile with the price linked to price-stable real-world assets such as FIAT currency (U. S dollar, Euro, etc.) even precious metal. Stablecoins are used as a store of value and serve as a primary medium of exchange. Stablecoins such as Tether (USDT) and Marker DAO’s Dai has risen to become popular among crypto traders. Traders can pair one stablecoin to another to avert investment risk and their holdings into actual FIAT currency. 

What Mechanism Does Stablecoins Use to Remain Stable?

There are two broad types of stablecoins: reserve-backed/collateralized and algorithmic stablecoins. Reserve-backed stablecoins, also referred to as collateralized stablecoins, are backed by real-world assets such as fiat or commodities (gold, silver, oil) and other cryptos. A well-known example of reserve-backed stablecoins is Tether, issued by “tokenizing” dollars by exchanging them for a stablecoin and depositing the dollars in a bank. The deposited dollars are then redeemed for the stablecoin, ensuring that it’s maintained at the price peg.     

The other type of stablecoin referred to as uncollateralized or algorithmic stablecoin is quite different from the first one since it’s fully decentralized and is stabilized by algorithms dictating its value. The value and stability of the stablecoin are maintained by algorithms that dictate its value and its supply. An example of algorithmic stablecoin is Basecoin.

Stablecoin Purchases Surge Amidst Crypto Market Collapse

The spread of the novel coronavirus has had its toll on the crypto markets, which on Wednesday, the 11th March 2020, lost nearly $30 billion in total market capitalization. The time of significant market deep, certain stablecoins such as USD-C, TUSD, and DAI saw a 200% increase in their 24-hours trading volume. The enormous surge in the 24-hour trading volume can be attributed to a broader market sell-off where crypto-traders bought significant amounts of stablecoins to escape market volatility and cushion themselves from the further market bloodbath. 

The unavailability of FIAT currencies in most crypto exchanges due to regulatory constraints have left stablecoins as the sole option to convert volatile crypto coins into safer, non-volatile alternatives. Upcoming stablecoins such as USD-C, PAX, and GUSD also gained massive 24-hour trading volume, even becoming favorite for most crypto traders. At the time of writing, six stablecoins ranked among the top crypto assets by capitalization. Below is how stablecoins ranked amid the crypto market meltdown. 

Best Performer – USD Coin (USD-C)

USD Coin (USDC) – a stablecoin backed by US dollars and owned by blockchain startups Circle and Coinbase saw an enormous rise in daily trading volume amid the market rout. The stablecoin rose in the market capitalization rank up from the 30th position with a $430 million market capitalization to 17th position with a $601.5 million market capitalization. Circle co-founder and CEO of Circle took to Twitter on 14th March, celebrate USDC’s current 40% gain in capitalization over the past month. He tweeted:

“USDC surging in market demand over the past days, reaching new ATH at $568m in circulation. Fascinating to see ‘flight to safety’ within the crypto macro market, but also demand for high quality USD liquidity for markets. While not as exciting to see markets so crushed, it’s still rewarding to see that this entirely new, entirely digital, blockchain-based monetary infrastructure is working.”   

USDT Ranks Fourth

USDT is one of the most notable stablecoin in the crypto space with the largest-stablecoin capitalization. Following the start of the crypto market plunge about four weeks ago, the USDT market cap has grown by 0.5% to $4.66 billion, landing it as the fourth position in the crypto market cap ranking. Nonetheless, Tether has still been affected by the market plunge, thanks to the falling prices of the assets that trade against USDT. The stablecoin’s trading volume has fallen from $60 billion to $48 billion, representing a 20% reduction in trading volume. 

PAXOS Moves Ranks from 27th to 42nd

PAXOS Standard (PAX) is the third-largest stablecoin with a current market cap of $218 million. The stablecoin has seen a 5% increase in market cap amidst the crisis, moving from 42nd position with a $208 million market cap to 27th position with a market cap of $218. The increase in market cap could also be linked to the recent injection of 7.6 million tokens from POX Treasury. PAX is also on record to gain an 80% 24-hour trading volume from $382 million to $684 million. 

Other Stablecoins That Have Gained Significantly

Apart from stablecoins highlighted above, others have also gained significant market cap in the past month.

  • TrueUSD (TUSD) – TUSD has moved from 60th position to now enter the top 50 cryptocurrencies by market capitalization, currently at 35. 
  • Binance USD (BUSD) – The past month has seen BUSD( launched six months ago) gain a substantial market share. The stablecoin has moved from 243rd position to 36th position in a single month (16th February to 15th March). The coin moved from a market cap of $17.5 million to a market cap of $124 million, representing a 600% increase in capitalization. The daily trading volume also increased by 50% from $78 million to $118 million. 

Why has Stablecoins Increased in Market Capitalization Amid Crypto Market Crush?

As mentioned earlier, stablecoins provide a link between cryptocurrencies and traditional finance and provide users with low volatility of fiat currencies plus the advantages of digital currencies, i.e., fast cross payments. With the deep in the crypto markets following the spread of COVID-19, crypto investors see stablecoins as a safe and efficient way of locking in gains from crypto trading and safeguarding their digital portfolios effects of the market crush-this could lead to enormous losses. This could explain the recent surge in stablecoin market capitalization as crypto traders are rushing to park their investment in stablecoin to escape sudden losses conveniently. 

The Bottomline

Stablecoins come in handy in the crypto space to cushion crypto traders from losses due to intense volatility. Since the start of coronavirus spread in the past two months, the crypto market has plunged, with Bitcoin’s market cap down by 50% in under a month. This, however, has been inconsistent with stablecoins, which have witnessed a massive rise in market capitalization. This has mainly been attributed to crypto investors rushing to lock their crypto gains from the market crash’s effects. The increased demand for stablecoins evidenced by their massive increase in market cap amid the market crash is an accurate indication of the crucial role played by stablecoins in the crypto space to avert the effects of volatility and prevent huge losses.

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Wayne is a Blockchain enthusiast and expert in crypto trading. Currently, he covers trendy issues on digital currencies.