The market value of stablecoins has soared by 140%, and demand has soared. Can it "boost" the Bitcoin bull market?

Recently, the total market value of stablecoins exceeded 12 billion US dollars, which triggered market discussions and attention. As a value medium for crypto asset transactions, stablecoins have a vital impact on the crypto field.

Since 2020, Bitcoin and other mainstream assets have experienced dramatic fluctuations in the financial market. The demand for stablecoins in the cryptocurrency field has increased day by day, and stablecoins have become a "hot commodity" in the eyes of investors. According to statistics, from the beginning of 2020 to date, the total market value of stablecoin supply has soared by 140%, the daily trading volume has climbed to US$1.5 billion, and the purchasing power has increased by 50%.

The growth of stablecoin market value is considered to be one of the main driving forces behind the rise in Bitcoin prices. So what are the reasons and significance behind the surge in stablecoin market value and demand? Can stablecoins become a booster for the next bull market?

Market value exceeds $12 billion, stablecoin trading is active

In recent years, the demand for stablecoins in the cryptocurrency field has been increasing day by day, and its market size has gradually risen since 2018. In 2020, the cryptocurrency market experienced drastic market fluctuations, and the stablecoin market ushered in explosive growth.

According to Messari's Stablecoin Index, the total value of stablecoin assets has exceeded $12 billion. According to previous data, as of January 2020, the market value of stablecoins was slightly above $5 billion. After the 3.12 crash, the market size of stablecoins soared, breaking through $10 billion for the first time in May. The total market value of stablecoins rose by nearly 140 percentage points in the first half of the year.

Stablecoin market value trend in 2020 Source: Stablecoin Index

After the birth of stablecoins, it took five years for the total market value to reach US$6 billion. After the March 12 cryptocurrency market crash, the total market value of stablecoins soared from US$6 billion to US$12 billion in just four months, which shows how fast its explosive growth was.

After the crypto market experienced a sharp drop on March 12, the sideways period of mainstream currencies has prolonged, and the on-chain transaction volume of Bitcoin has dropped sharply this year. According to CoinMarketCap data, the transaction volume of Bitcoin has dropped again by 16% in the past week, falling to about $13 billion. In sharp contrast, the performance of stablecoins is becoming more and more active, especially USDT, and the number of active addresses has continued to grow since March.

CoinMetrics data shows that in June 2020, the amount of transactions using stablecoins began to exceed that of Bitcoin, which is a historic event for stablecoins.

Trends in transaction value on stablecoins, Bitcoin, and Ethereum chains

At the same time, Messari data shows that USDT's daily trading volume is currently $1.5 billion. According to BitcoinTradeVolume data, Bitcoin's actual daily trading volume is currently about $430 million. This means that USDT has become the only cryptocurrency with a daily trading volume of more than $1 billion, far higher than Bitcoin's trading volume.

In addition, data from Glassnode shows that the Stablecoin Supply Ratio (SSR) is currently just above 15 (16.12), a new low, which means that, in theory, stablecoins can buy about one-fifteenth of all Bitcoins.

The Stablecoin Supply Ratio (SSR) is the ratio between Bitcoin supply and stablecoin supply, calculated by dividing Bitcoin's market capitalization by the market capitalization of all major stablecoins. The lower the SSR, the stronger the purchasing power of stablecoins over Bitcoin.

For reference, in March 2018, the stablecoin supply ratio was 88. In just over two years, the purchasing power of stablecoins over Bitcoin has increased more than six times.

Stablecoin Supply Ratio (SSR) Source: glassnode

To sum up all the data, the market demand and trading activity of stablecoins have continued to rise since the beginning of this year. Under conditions of high market volatility and low trading activity, stablecoins have increasingly highlighted their value and advantages and have become a "hot commodity" in the crypto market.

Why is the demand for stablecoins surging?

The market value of stablecoins increased by $2.4 billion in the first quarter of 2020 and a total of $3.8 billion in the second quarter. Why is the stablecoin market developing so rapidly? Where does the market demand mainly come from?

Taking into account the market environment and the development of stablecoins themselves, OKEx Intelligence Bureau believes that the surge in demand for stablecoins is mainly related to three factors: arbitrage demands, risk aversion needs, and the outbreak of DeFi.

In the total market value of stablecoins, the total supply market value of USDT is over 10 billion US dollars, accounting for more than 83% of the stablecoin market share. Therefore, it can be said that the demand for USDT dominates the total demand for stablecoins. The reason why USDT transactions are becoming increasingly active can explain why the demand for stablecoins represented by USDT has increased dramatically.

1. Driven by arbitrage demands

Since the beginning of this year, USDT's continued negative premium has created arbitrage opportunities. According to Kraken data, except for the nearly one month after the market crash on March 12, USDT has been in a negative premium state in the past six months. Specifically, affected by the Spring Festival effect at the beginning of the year, USDT had a serious negative premium, up to -3%; this state was broken in mid-March, and USDT turned to a higher positive premium phenomenon; at the same time, Tether began to issue more coins crazily, and the price of USDT soon fell back to the negative premium level again, and it has basically continued to this day.

USDT price trend in 2020 Source: Kraken

A higher positive or negative premium rate will give rise to a large number of arbitrage investors. For example, when the negative premium rate is too high, arbitrage investors can use the OTC platform to buy USDT with RMB (CNY) and then exchange it for US dollars, thereby making profits by taking advantage of the price difference.

2. Safe-haven demand

Affected by the 2020 coronavirus pandemic, financial markets experienced severe turbulence, stimulating capital outflows and the growth of risk aversion.

Although the United States has introduced a large-scale economic stimulus plan, the U.S. dollar continues to appreciate against other major currencies. Therefore, stablecoins that provide channels for U.S. dollar investment are becoming more and more popular. During periods of global economic turmoil, the U.S. dollar has performed relatively strongly, and investors hope to increase the proportion of U.S. dollars in their portfolios, viewing the U.S. dollar as a "safe haven." Stablecoins are a better way to store and transfer dollars around the world.

In addition, according to the ViewBase platform, from the changing trends of the Bitcoin and USDT wallet balances on exchanges from March to April, it can be inferred that after March 12, in order to cope with the extreme volatility risks of cryptocurrencies, investors' demand for stablecoins, especially USDT, has increased significantly.

Changes in BTC and USDT exchange wallet balances in 2020 Source: ViewBase

3. The explosion of DeFi

In 2020, DeFi has exploded. In the second quarter evaluation of stablecoins, Messari researcher Ryan Watkins pointed out that the use of stablecoins is also related to the rise of DeFi. Due to their stable value and low volatility, stablecoins have unique advantages in payment and storage staking. Currently, more than $2 billion in value is locked in DeFi platforms. Among them, USDT is one of the main participants. Stablecoins, mainly USDT and Dai, have become the foundation and core of DeFi services. The outbreak of pledged lending platforms such as Compound has greatly stimulated the use and demand of USDT.

In addition, cross-border fund transfer may also be a relevant factor. In addition to the cryptocurrency market, the cross-border remittance sector has also been hit by the epidemic. With the closure of traditional cross-border circulation channels, the demand for international fund transfers seems to be spilling over into the stablecoin sector.

Can Stablecoins Boost Bitcoin Bull Market?

It can be seen that stablecoins not only occupy a strategic position in the cryptocurrency market, but also play an extremely important role.

Driven by the epidemic, its application scope is also expanding, and stablecoins are going viral. In the future, as this trend continues to develop, stablecoins may usher in even more rapid growth.

But what investors are more concerned about is what impact the growing demand for stablecoins will have on cryptocurrencies such as Bitcoin?

Since the threshold for converting stablecoins into Bitcoin or other digital assets is relatively low, many investors believe that the surge in demand for stablecoins will become a bull market "fuel" for mainstream currencies. At present, this trend may eventually have some beneficial effects on Bitcoin and the cryptocurrency market.

According to multiple data indicators, the market is moving in a positive direction. For example, according to Glassnode's SSR indicator, the stablecoin supply ratio, which represents the purchasing power of stablecoins, has reached a new low, releasing a bullish signal. The latest weekly research report released by Glassnode also pointed out that the net supply of stablecoins anchored to the US dollar has soared, exceeding Bitcoin. The demand for such stablecoins is rising, and traders and investors can use new stablecoins to inject funds into the Bitcoin market.

These stablecoin funds tend to improve liquidity in the cryptocurrency market, with traders using them to buy or sell cryptocurrencies without the involvement of banking institutions and seeking stability during periods of high trading volatility. The report concluded that the more funds there are in the stablecoin market, the greater the probability that Bitcoin will start a new round of price increases in a short period of time.

However, at the same time, there is another voice and question: Will stablecoins gradually surpass Ethereum and Bitcoin, devour market share, and become the leading cryptocurrency? Is this a threat to Bitcoin investors? In this regard, there are indeed relevant predictions and statements. Research analyst Watkins said in his stablecoin report that USDT may soon surpass Bitcoin and become the dominant currency on the public blockchain in the future.

However, there is no need to worry too much about this. People will not abandon mainstream currencies and choose stablecoins, and the potential of cryptocurrencies will not be weakened. On the contrary, stablecoins are at the core of the entire financial system, connecting traditional finance on one end, digital assets on the other, assets on the other end, payments on the other end, on the other end, and on the other end.

"In the long run, stablecoins are not a compromise solution for the crypto market, but a Trojan horse that can attract more and more off-site funds into the cryptocurrency market," said Watkins. (OKEX Intelligence Bureau)