Why Is the Stablecoin Market Shrinking?

The total market capitalization of all stablecoins has been going down for a year. Why is the stablecoin market shrinking? What does this mean for the universe of crypto? A recent report by JPMorgan notes the important role that stablecoins play in crypto. They indicate that crypto itself has just begun to recover from crypto winter and that the recovery will not be complete until the total market cap of all stablecoins reverses course and corrects to its prior value or goes higher.

Stablecoin Market Cap Versus Crypto Market Cap

Over the last 13 months the total market capitalization of all stablecoins has been falling. During the same time, the total value of the Bitcoin token fell as well. The Bitcoin fall was much more dramatic with BTC starting the month of April 2022 at $45,000 and falling to $16,500 by the end of the year. The value of the Tether stablecoin stayed at $1 plus or minus a fraction of a cent through all of this time. Nevertheless, the market cap of Tether fell from 83 billion in US dollars to 66 billion in US dollars from April to June of 2022. The fall in Bitcoin market cap was because of the fall in price of individual tokens. The fall in Tether market cap was because people did not want to hold these stablecoins even though they did not individually fall in value like Bitcoin did. Today the market cap of Tether is going up even though the total stablecoin market cap is still falling. Why is that?

Sorting Out of the Stablecoin Marketplace

We wrote a while back about the fallout from Binance trading violations. Regulators are catching up with the Binance exchange and this is affecting their operations. A part of the relative rise to prominence of the Tether stablecoin has to do with the fall of the Binance stablecoin. The point of holding stablecoins is to have a foot in the crypto realm but not be buffeted about by the extreme price fluctuations typical of crypto tokens like Bitcoin. DeFi businesses that believe crypto would go up forever paid a heavy price in the last year or more. As long term, serious investors have moved into crypto they have expected the same sorts of regulatory guarantees of their assets that they get from banks, insurance companies and stock, commodity, or currency markets.

Is Investment Capital Entering or Leaving the World of Cryptocurrencies?

Here is where the concern lies regarding the shrinkage of the total stablecoin market capitalization. Stablecoins are the backbone of the crypto financial system. They are the reserves and invested capital on which systems like DeFi, NFTs, blockchain gaming, and even parts of the evolving Metaverse run. To the degree that the stablecoin market capitalization is shrinking, capital is flowing elsewhere for investment purposes. This is the sort of situation that occurs with a recession or when foreign direct investments are directed to different parts of the world.

Contrary to pre-crypto-winter hype, the crypto world does not stand apart from the larger financial system. It offers a wide range of possibilities that traditional finance does not offer. However, for capital to flow smoothly back and forth and generate business and wealth, it needs a stable, reliable, and growing reserve. That is where new rules and regulations that reassure investors will be key to reversing the shrinkage of the stablecoin market cap.

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