Market Minute: Stablecoin Wars 2.0

By fklivestolearn | Technicity | 28 Jan 2023

Dollar-pegged stablecoins like Tether (USDT), USDC and Binance coin (BUSD) have daggers drawn as they aim for supremacy

Back in 2018, there Tehther (USDT) almost had complete control over the stablecoin market, with no serious competitor in the landscape. Then came the Coinbase-Circle-based USDC which almost immediately become the second biggest stablecoin — chipping away at USDT’s dominance. This was arguably the first stable coin war, opening up the space for further competition.

Then came BUSD in 2019— another fiat-collateralized stablecoin launched in collaboration between Binance and Paxos. Just like USDC, it had the backing of one of the biggest crypto exchanges and started to gain traction, becoming the third-largest stablecoin by market cap. For the next few years, the stablecoin market flourished — first as cryptos surged in 2021, and then in 2022 as investors fled to the safety of dollar-pegged coins.

Dollar-pegged stablecoins flourished even more as the algorithmic stablecoins market share dwindled in the wake of the Luna (UST) contagion event. Coming back to the tug of war between the fiat collateralized stablecoins, Binance announced it would auto-convert USDC, USDP, and TUSD into BUSD on Sep. 6, 20222 — thus igniting the ‘Second Great Stablecoin War’. In the wake of this announcement, BUSD’s share of the total stablecoin market has risen from 10.01% to 15.48%.

This move, however, turned out to be temporary as solvency and mismanagement worries at the stablecoin’s parent Binance exchange precipitated the investors to dump BUSD. According to blockchain analytics provider Nansen, the circulating supply of BUSD decreased to $15.4 billion on Jan. 25. The drop represents a decrease of $1 billion from the previous week and $2 billion compared with December 2022. As a result, the market dominance of BUSD slumped too.

Nonetheless, the top 10 stablecoins remained unchanged with USD Coin (USDC), Binance USD (BUSD) & Gemini Dollar (GUSD) being the only stablecoins to record a decline in market capitalization in January (top chart above). According to CryptoCompare, the market capitalization of Tether (USDT) rose 0.82% to $66.7B, increasing its market share to 48.7% — the highest dominance recorded since October 2021. BUSD saw its market capitalization fall 3.97% to $16.1B.

The second chart above more accurately reflects how Stablecoins War 2.0 is shaping up. Heating up this conflict, Coinbase made an announcement introducing a zero-fee trade to swap USDT for USDC — citing stability and trust as the main driver for the support for the stablecoin. USDC currently accounts for less than 1% of the stablecoins trading volume on Coinbase. It has the biggest share on the Gemini exchange.

As evident from the chart, exchanges are showing their preference for a certain stablecoin — encouraging or at times even forcing users to switch to a stablecoin of their choice. While we were talking about an increasing stablecoin market dominance only recently, the same is currently at 12.4%, falling from the all-time high of 16.5% in December. The decline in dominance suggests market participants are rotating out of stablecoins and into other assets. Bitcoin and other riskier cryptos are back in favor.

Originally Published on Medium

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fklivestolearn

Prolific Blogger on Medium with my own publication Technicity. Extensive trading experience in Forex & Stocks based on technical studies. Cryptocurrency trader and Enthusiast, Blockchain/Fintech Evangelist & generally just a Technology Freak.

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