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Stablecoins Are Evolving to Make Crypto Assets Irresistible to Wall Street Investors

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·5 min read
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2020 U.S. presidential candidate Michael Bloomberg has published a financial reform plan that among other things advocates for a stronger financial system. Part of the proposed reform also recommends the creation of a regulatory sandbox for startups and "providing a clear regulatory framework for cryptocurrencies." Wall Street still regards the cryptocurrency industry with a cautious degree of skepticism, but stablecoins are increasingly providing a clearer path to the mass-market adoption of the new asset class.

Stablecoins have risen in popularity to become a major source of liquidity in the cryptocurrency market. They provide an on-ramp to enter the crypto markets and an off-ramp to exit the cryptocurrency market. The rising popularity of stablecoins is a function of their inherent stability relative to other types of cryptocurrencies.

This piece discusses how stablecoins are free from the historical volatility of cryptocurrencies and how they are evolving to offer different types of on-and off-ramp opportunities that will make cryptocurrencies more attractive on Wall Street.

Wall Street is already testing the crypto waters

Even though Wall Street is yet to be fully onboard the cryptocurrency train, several equities, ETFs, and traditional instruments provide some level of exposure to the industry. For instance, Nvidia Corporation (NASDAQ:NVDA) and Advanced Micro Devices, Inc. (NASDAQ:AMD) both have significant exposure to the crypto market because of the use of their graphics processors in crypto mining operations. In the year-to-date period, both Nvidia, and Advanced Micro Systems have delivered 23% as seen in the chart below.

Other stocks such as Grayscale Bitcoin Investment Trust (GBTC) provides a more direct level of exposure to the crypto industry as a publicly-traded Bitcoin fund. Overstock.com, Inc. (NASDAQ:OSTK) is one of the first traditional companies to adopt crypto payments and it currently keeps about 50% of its crypto payments, which ties its fate to the success or failure of the crypto market. In the year-to-date period, both Grayscale Bitcoin Trust and Overstock have delivered 56% and 25% gains respectively.

When compared to the rest of the US market in the year-to-date period, Wall Street assets with exposure to the cryptocurrency market have delivered double-digit gains. In contrast, the S&P 500, NASDAQ Composite, and the Dow Jones Industrial Average have only managed to deliver single-digit gains in the same period.

The rising popularity of stablecoins across different market segments

Tether USDT is unarguably the biggest stablecoin in the market – it has been enjoying a first-mover advantage since its launch in 2015. It has more than 80% of the market share for stable coins and it has managed to maintain parity with the USD despite the recurrent panic episodes that accompany significant drops in the price of Bitcoin.

In 2019, the supply of USDT was increased from 2 billion tokens to 4.108 billion tokens to account for growing adoption. More so, the token was moved from the Omni-layer to the Ethereum network to facilitate the faster and cheaper transfer of value. Interestingly, a Chainalysis report shows that “for Chinese exchange users, Tether has replaced the yuan as the go-to fiat currency” as data from exchanges showed that almost all fiat-crypto trades in Mainland China was between Yuan and USDT.

Dollar Neutrino USDN is an algorithmically stable USD-pegged asset that is collateralized with the WAVES blockchain platform. Waves is rapidly driving the adoption of DeFi products and they are gradually becoming a leader in the industry. In addition to providing stability, USDN provides token holders with additional revenue streams through staking in much the same way that traditional dividend stocks provide returns. Launched barely one month ago on January 28, 2020, the token now has more than $3.2 million staked as it delivers a staking reward of about 8.9% per annum.

Whereas other stablecoins merely provide entry and exit into the crypto market, USDN also allows holders to stake their tokens for additional returns. Hence, when traders exit their crypto holdings into stablecoins to avoid the inherent volatility of the crypto market, USDN provides an opportunity to stake their funds and earn staking rewards until they are comfortable enough to return to the active trading of cryptocurrencies.

In 2018, Coinbase and Circle created the CENTRE Consortium which in turn created the USD Coin USDC, a stablecoin pegged to the USD. Interestingly, while the use case of the original USDT is limited to the crypto industry and USDN allows people to earn low-risk rewards on cryptocurrencies, the USDC is serving as a measure of value in the brick and mortar world.

The USDC is gradually building a reputation as a stablecoin accepted by the government of a sovereign nation for the payment of taxes. Last year, Circle released a statement on how Bermuda became the first government to accept payments for taxes, fees and other government services using USD Coin (USDC). In less than two years, the market cap of USDC has grown to more than $430M and more than $700 million worth of the token are traded each day.

Summary

Cryptocurrencies are here to stay and stablecoins have an important role to play in driving the mass-market adoption of the new asset class. In 2019, JPMorgan revealed its plan to build a stablecoin, JPMCoin, and Facebook led a consortium of tech and payments companies to launch Libra.

Going forward, the differentiation of stablecoins- USDT for facilitating crypto trades, USDN for facilitating low-risk crypto investments, and USDC for facilitating localized payments, among others, suggests that are different opportunities for Wall Street to leverage cryptocurrencies without being unnecessarily exposed to the volatility.

Disclosure: None.