“It would be difficult here to imagine a sustained recovery in crypto prices without the shrinkage of the stablecoin universe stopping,” J.P. Morgan analyst Nikolaos Panigirtzoglou wrote in a recent note to clients.
Although the price of bitcoin (BTC-USD), the world’s largest digital token by market cap, jumped over 61% year-to-date, it’s still down around 60% since the November 2021 peak and 11% from a year ago, amid increased regulatory scrutiny of the industry and the fallout from a slew of high-profile bankruptcies that triggered a $2T wipeout. Similarly, the largest altcoin, ethereum (ETH-USD), surged more than 50% YTD and dropped over 60% from the November 2021 all-time high and roughly 10% Y/Y.
Panigirtzoglou argued that the YTD crypto recovery might not turn out to be as sustainable as some have suggested as the stablecoin universe dwindles. He explained that stablecoins, whose value is tied to a reserve asset, “are the equivalent of cash in the crypto ecosystem,” essentially serving as a means of payment for various crypto transactions. For instance, traders use stablecoins like tether (USDT-USD) and USD Coin (USDC-USD) to swap in and out of various cryptos without having to use fiat currencies like the U.S. dollar.
“Headwinds from the US regulatory crackdown on crypto, the unsettling of banking networks for the crypto ecosystem and the reverberations from last year’s FTX collapse are weighing on the stablecoin universe which continues to shrink,” he said.
The market cap of the largest stablecoins, Panigirtzoglou noted, has declined by nearly $60B since topping out at $186B in May 2022, before the multibillion-dollar collapse of the Terra ecosystem (LUNA-USD) (UST-USD). As such, the slump accounted for a little more than one-third of the Terra downfall.
Still, the stablecoin market share stood at less than $30B at the start of 2021 and just around $5B at the start of 2020, underscoring how quickly such tokens have gained popularity. Likewise, the crypto market cap of $1.14T as of Friday afternoon compared with the ~$3T peak in November 2021, $833.3B at the start of 2021 and $193B at the start of 2020, according to CoinMarketCap data.
“The expansion of the stablecoin universe can be thought of as a proxy for the amount of money that has entered the crypto ecosystem from fiat and vice versa,” the note said. In other words, cryptos and stablecoins are interdependent.
More trouble ahead in the wake of U.S. debt-ceiling impasse? The analyst explained how reserves of major stablecoins have increasingly consisted of Treasury securities, “implying a big challenge by stablecoins to maintain their pegs in an adverse scenario of a US technical default.”
Such an issue under this adverse scenario “could reverberate to the whole crypto ecosystem given the vital role stablecoins play in the crypto ecosystem in facilitating access to trading and decentralized finance and as source of collateral,” he contended.
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