Stablecoins Targeting Trillion-Dollar Industries
Written by Juan Leon and Ari Bookman, Bitwise
Translated by Luffy, Foresight News
Bitwise’s research team releases the “Cryptocurrency Market Review” every quarter, analyzing the most important fundamentals and trends that impact the cryptocurrency market. The Q3 market review was particularly exciting.
On one hand, cryptocurrency prices remained lackluster, with the market consolidating sideways for most of the past six months.
But on the other hand, as Bitwise’s Chief Investment Officer Matt Hougan said, “the surface calm hides enormous progress.”
We want to highlight one aspect of this progress: stablecoins becoming the dominant application of cryptocurrency technology.
Why should investors care about stablecoins?
Stablecoins are no longer niche; we have been talking about them for many years. Traditional giants like PayPal are launching their own stablecoins. High-level officials in the US House of Representatives and Senate are discussing stablecoins. Last week, payment processing giant Stripe announced its plan to acquire stablecoin issuance platform Bridge for $1 billion, making it the largest acquisition in the history of the cryptocurrency industry.
So, what makes stablecoins so valuable? And why should investors pay attention to them?
Unlike other cryptocurrencies, stablecoins are designed to maintain a stable value relative to some asset (typically the US dollar). If you see price fluctuations in stablecoins, something is wrong. This reduces their appeal as an investment target and positions them more as a medium of exchange. More importantly, this role makes stablecoins a bridge between traditional finance and the crypto economy.
Moreover, they are fast, efficient, and programmable. You can send $10,000 to anyone in the world within seconds, without worrying about banking hours or lengthy settlement times. As digital assets, stablecoins can be programmed to execute smart contracts, enabling automated payments, custody services, and various decentralized finance (DeFi) applications.
That’s why stablecoin usage has skyrocketed to record levels. In the first half of this year, over $5.1 trillion worth of transactions were conducted through stablecoins globally, which is comparable to Visa’s $6.5 trillion.
Stablecoin transactions, data source: Bitwise Asset Management, Coin Metrics. Data range from Q1 2020 to Q3 2024. Note: “Other” includes BUSD, DAI, FDUSD, GUSD, HUSD, LUSD, PYUSD, TUSD, USDK, and USDP.
How did stablecoins take off?
Why would traditional payment giant PayPal launch stablecoins? The answer is that the business model is just too good.
The issuers collect dollars (or other fiat currencies) and issue an equivalent amount of stablecoins. They then use these fiat currencies to purchase US Treasury bonds and other income-generating assets. Finally, they pocket the interest income.
How effective is this model? The largest stablecoin issuer, Tether, made more profit than BlackRock last year.
These issuers are becoming major players. As shown in the chart below, the total amount of US Treasury bonds held by the top five stablecoins surpasses that of some G20 countries like South Korea and Germany. Therefore, the growth of stablecoins provides a new source of demand for US debt and helps provide liquidity to the US Treasury market, benefiting the broader financial system.
Investors are eager to get involved. Tether’s biggest competitor, Circle, has quietly filed for an IPO this year, indicating its willingness to assist investors. Additionally, publicly listed companies like Visa have plans to integrate stablecoins into their businesses.
Stablecoin holdings of US Treasury bonds, data from the US Department of the Treasury and company reports. Data as of June 30, 2024.
What opportunities should investors seize?
So, how can investors seize this opportunity?
Remember: stablecoins do not appreciate in value; they face the same inflationary pressures (and currency exchange risks) as the assets they are pegged to.
So, what opportunities should investors look for? And what risks should they be mindful of?
1) Publicly listed companies
Some multinational companies are integrating stablecoins into their businesses to gain a competitive edge. These companies are reflected in cryptocurrency stock indices such as the Bitwise Crypto Innovators 30 Index. As stablecoins offer lower transaction costs and faster settlement times than traditional intermediaries, we expect more companies like Visa and PayPal to enter the stablecoin space, alongside more banks and payment processors.
2) Potential alternatives to money market accounts
For most stablecoin holders today, their stablecoins are similar to cash in a checking account: they don’t earn interest. But what if issuers could offer part of the profits they obtain from their treasury reserves as interest?
If this avenue opens up, stablecoins could become an attractive alternative to the $6.3 trillion money market fund industry. For advisors with clients holding cash, stablecoins could be a useful tool in their portfolios. As stablecoin regulation is a hot topic in the US Congress, this is worth paying attention to.
3) Value accumulation in underlying blockchains
Most stablecoin activity happens on Ethereum. The growth of stablecoins directly contributes to the growth of the network and indirectly influences the price of ETH. Of course, the reverse is also true: if stablecoins fail, it could put pressure on network activity.
Final thoughts
How big can stablecoins become? Imagine this:
The total amount of US deposits is approximately $18 trillion. Currently, stablecoins only account for 1% of this market size. If we see large-scale interest-bearing stablecoins approved or a clearer regulatory framework established, how much will their relative market share change?
For investors, the signal is clear: it’s time to pay attention to stablecoins.
