Bitcoin halving will take place tomorrow, but the biggest winner is not BTC

Source: Blockchain Frontier

By Timothy Lloyd

Translator: Wang Qiang

The stablecoin boom has pushed their total market value to over $9.5 billion this year, which could herald a bull run for Bitcoin ahead of its upcoming halving.

At around 3:00 am Beijing time on May 12, Bitcoin will reach block height 630,000, and the block reward will be reduced from 12.5 BTC to 6.25 BTC. The third block reward halving in Bitcoin history is about to occur (the first two halvings occurred on November 28, 2012 and July 10, 2016). According to BTC.com data, the current BTC block height is 629939, and there are still 61 blocks away from the block height of 630000.

With the arrival of Bitcoin halving, Bitcoin prices have also fluctuated greatly, but the market value of stablecoins has only increased. According to DAppTotal data, the total market value of stablecoins exceeded US$9.5 billion last month, among which Tether (USDT), the oldest, largest and most widely adopted stablecoin, gained more than US$1 billion in value in April alone.

Ganesh Natraj, assistant professor of finance at Warwick Business School in the United Kingdom, told Decrypt that anticipation for Bitcoin’s halving could drive the issuance of stablecoins.

Natraj, who recently co-authored a paper with UC Berkeley professor Richard Lyons on the impact of stablecoins on macro cryptocurrency markets, said the issuance of USDT could be driven by “expectations for the price of bitcoin later this year, and as the halving approaches, investors may be hoarding USDT.”

Messari, a cryptocurrency trading analysis company, believes that as traders are adding stablecoins to exchanges to buy Bitcoin, the amount of stablecoins deposited in exchanges this year has reached $3 billion, setting a historical record for stablecoin reserves.

Of course, some traders are betting that the price of Bitcoin will rise after the halving. Dan Morehead, CEO of blockchain investment firm Pantera Capital, wrote in an April letter to investors: "If the number of new Bitcoins in supply is cut in half, all other things being equal, the price of Bitcoin will rise." Morehead pointed out that on the one hand, the Federal Reserve has adopted "unlimited" quantitative easing to curb the financial crisis caused by the coronavirus, and on the other hand, paper money has become a medium for the spread of diseases. In this context, "the probability of Bitcoin rising is more than 50%, and rising rapidly."

In addition to the roughly $2.7 billion in new Tether stablecoin issuance in 2020, blockchain financial compliance firm Chainalysis found that USDT transaction volume, either on-chain or moving between cryptocurrency wallets, increased 250% in the 12 months ending in March.

Much of this growth can be attributed to transactions settled on the Ethereum (ETH) blockchain, which accounted for 90% of all USDT settlements in March. In fact, according to Messari, ETH’s value transfer volume reached BTC levels for the first time in April.

The growing demand for BTC reflects the rising demand for ETH, global foreign exchange, and the US dollar in the entire capital market.

Despite the fact that the price of BTC has surged more than 20% in the past month, Ganesh and Lyons found no systematic evidence that the issuance of stablecoins affects the price of cryptocurrencies. Their research contradicts a controversial view that Tether issuance has played a role in manipulating the price of Bitcoin, a view that was concluded by a widely cited 2018 University of Texas study.

They argue that the opposite is true. Stablecoin issuance, Ganesh and Lyons write, “endogenously responds to deviations of the secondary market exchange rate from the peg.” In other words, stablecoin issuance is a response to changes in the cryptocurrency market, and stablecoins play a safe-haven role in the cryptocurrency economy.

Matthew Graham, CEO of Beijing-based blockchain investment firm Sino Global Capital, agreed. “In general, we think it’s not easy to predict the price of Bitcoin based on stablecoin indicators. There are correlations, but these effects are overwhelmed by other factors, such as investor sentiment towards the halving and the actual supply of new Bitcoins,” he said.

Broadly speaking, however, Graham said he is modestly bullish on Bitcoin’s price post-halving, but that this bullishness is not directly correlated to the excessive growth in stablecoin usage (and popularity as a safe haven).

At the heart of the stablecoin safe haven story is dollarization.

Over the past century, the U.S. dollar has been the global reserve currency, the safest and most convertible choice among various fiat financial instruments. The ongoing economic chaos caused by the COVID-19 pandemic has caused the world to seek refuge in the U.S. dollar. The cryptocurrency market is no exception - people are fleeing to stablecoins.

While Tether accounts for the lion’s share of stablecoin market activity, competitors such as the exchange-backed USD Coin (USDC), Binance USD (BUSD), and Huobi’s HUSD token are gaining traction among traders.

The commonality between Tether and its emerging rivals is their integration with cryptocurrency exchanges. “Proximity to liquidity hubs is important,” Messari wrote. Another common factor is that the three most powerful stablecoins are closely tied to Asian markets.

Tether’s parent company, iFinex, is based in Hong Kong, while Binance is led by a Chinese-born CEO and receives most of its BTC inflows from Huobi, a Singapore-based exchange founded in China. The second-largest BTC flow between exchanges is simply the reverse flow from the leader, with about $1.2 billion flowing from Binance to Huobi, according to 2019 data from cryptocurrency tracking service Token Analyst.

Darius Sit, managing partner at QCP Capital, an over-the-counter trading firm based in Singapore, said stablecoin flows are also returning to Asian markets with this reverse flow.

Sit told Decrypt that his company is increasingly seeing stablecoins used in financial transactions for trade in Asia. “Stablecoins are trading an average of $10 million to $20 million a day,” Sit said. “ 90% of our spot trading business is stablecoins. ”

He added that businesses in Malaysia and Indonesia, for example, are using stablecoins to pay their suppliers in China and transferring funds through ETH wallets.

Data from Chainalysis supports this, too. The firm told Decrypt that over the past month, most of the demand for Tether has come from institutional traders or over-the-counter exchanges that may be based in China.

While 75% of UDST/ETH transfers were for less than $2,000, large transactions of more than $100,000 each accounted for 65% of the total market value. Chainalysis spokesperson Maddie Kennedy said: "This suggests that a large part of the demand for Tether may come from professionals, who may be from China, where there are no regulations allowing citizens to enter the cryptocurrency market."

Jeff Liu, co-founder of Chinese blockchain security firm Peck Shield Inc, agreed. “Most stablecoin users are in China and Asia, and their usage has been accelerating in recent months,” he said.

Sit believes the shift is driven by “currency liquidity.” Companies doing business in the Asia-Pacific region have experienced a freeze in banking activity in the wake of the COVID-19 pandemic. Sit said they have turned to stablecoins, which can enable more instant, cheaper, and smoother business-to-business payments across Asia.

“Stablecoins are still primarily used for crypto trading and facilitating capital flight,” Liu said. A 2019 Peck Shield report found that cryptocurrencies facilitated about $11.4 billion in capital flight from China last year, much of it denominated in Bitcoin and Tether. Most of that money went to countries with looser capital controls, such as the U.S., Japan and Singapore, he added.

Despite the increase in stablecoin adoption in Asia, Sit believes that the Bitcoin halving “might not have that big of an impact.” As block rewards decrease further, it will become more difficult for miners with fewer resources to compete with their industrial-scale counterparts.

Sit predicts that the result will be this: miners who are overly expensive under the new cryptoeconomic system may shut down their mining machines and liquidate their holdings, putting downward pressure on the price of Bitcoin. He also noted that "miners with more resources may collude to further drive down the price in order to accelerate the demise of small players and seize more network share."

Regardless, the growing adoption of stablecoins in Asia, coupled with the first major trial of the People’s Bank of China’s digital yuan, which will launch this week, suggests that in this market for cryptocurrency, “the world is one step behind China,” Sit concluded.

This article was originally published on the Decrypt blog and was translated and shared by InfoQ Chinese with the permission of the original author.

Original link:

https://decrypt.co/27536/10-billion-stablecoin-boom-as-bitcoin-halving-nears