USD Stablecoins Are Surging, but Zero Interest Rates Complicate Business Model

CoinDesk columnist Hasu is a pseudonymous crypto researcher publishing analysis for Deribit Insights and his personal blog.

“There are decades where nothing happens, and there are weeks when decades happen.” Vladimir Lenin – allegedly

The last 30 days have been historic by any meaning of the word. The coronavirus is shaking up life as we know it, and has already caused unprecedented dislocations in both the traditional financial markets and the crypto market.

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In the center of this financial turmoil was the U.S. dollar, which saw a “flight to safety” from many different assets, including ones deemed “safe” by traditional investors. As I write this article, the S&P 500 is down 20 percent against the dollar in 2020, crude oil down 62 percent, the British pound down 9 percent, and both the Russian ruble and the Brazilian real  are down 25 percent respectively.

While the crypto markets have been insulated from the markets at large for a long time, this is no longer the case now that public blockchains have effectively become rails for the U.S. dollar in the form of dollar-backed stablecoins. Dollars on the blockchain represent the third largest asset in crypto after bitcoin (BTC) and ether (ETH) , ahead of XRP (XRP) and bitcoin cash (BCH). In terms of transactions volume, they are even encroaching on bitcoin itself:

And since they are backed by dollars, they are both affected by global changes in demand for the U.S. currency as well as the monetary policy of the Federal Reserve.

Since bitcoin fell from its $9,000 range all the way below $4,000 before consolidating around $5,000 in mid March, stablecoins as a group have seen net inflows of around $2 billion, a 33 percent increase. This represents the largest surge in demand ever, in line with the dollar’s demand surge in traditional markets.

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