2021 has been a massive year for the cryptocurrency industry, with over $1 trillion of new capital flowing into the blockchain space this year alone. Stablecoins, cryptocurrencies pegged to the price of $1 USD, have seen mass adoption this year too. But, with cryptocurrency prices skyrocketing, why are investors buying into fiat-pegged stablecoins?
As seen by the data collected by on-chain analytics firm glassnode, stablecoins have seen huge adoption over the past few years. As more users adopt stablecoins, the price of these assets become more stable, as less arbitrage opportunities are created within the markets. As you can see from the gray lines on the chats below, stablecoin prices used to fluctuate a few percentage points in either direction but have since seen much higher rates of stability. This ensures that investors won’t experience significant slippage when buying or selling fiat-pegged stablecoins.
Cryptocurrency Wallets Holding USD Coin From January 2019 - September 2021
The above chart shows the volatility of USDC in gray, juxtaposed by the number of users that hold the stablecoin in their cryptocurrency wallets in blue. Since the beginning of 2020, the number of wallets holding USDC has increased from less than 100,000 users to over 1 million.
Cryptocurrency Wallets Holding DAI Stablecoin: January 2020 - September 2021
DAI, a stablecoin created by MakerDAO, has seen similar growth over the 18 months. In January 2020, there were less than 25,000 cryptocurrency wallets that held the DAI stablecoin. In contrast, about 400,000 cryptocurrency wallets currently hold DAI today.
But why are investors rushing into stablecoins when there are profits to be made on volatile cryptocurrencies like Bitcoin and Ethereum? The answer: Stablecoins offer a low-risk way to earn solid interest that beats any rates offered in traditional markets.
There are 2 primary reasons stablecoin interest rates dwarf those from the banks: technology and tax.
Since blockchains cut out the middleman, lending markets in crypto have become extremely efficient, passing down value to those who deposit stablecoins into high-yield savings accounts.
Additionally, many crypto holders are sitting on millions of dollars of unrealized profits. Should they need liquidity they are faced with 2 choices: sell the precious crypto and pay 20% capital gains tax, or collateralize the crypto and pay 5-10% interest to avoid selling. For many, the decision is simple.
Thanks to these early investors and the efficiencies of blockchain technology, anyone in the world can loan stablecoins such as USDC and DAI and earn nearly a 5-10% yield with very low risk.
See Also: How to Earn 9% APR on USDC With Voyager
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