14 Months of Decline: Stablecoin Market Raises Concerns of Capital Outflow

14 Months of Decline: Stablecoin Market Raises Concerns of Capital Outflow


The ongoing decline in the stablecoin market raises concerns about capital outflow from the cryptocurrency market, as major financial institutions such as JPMorgan and Goldman Sachs highlight the impact of shrinking stablecoin market on cryptocurrency prices, with J.P. Morgan analyst Nikolaos Panigirtzoglou expressing concerns over the long-term viability of progress in the crypto market this year, emphasizing the need to address the declining stablecoin ecosystem.

The ongoing decline in the crypto stablecoin market persists to persist, marking the 14th consecutive 30 days of contraction and raising concerns about the outflow of financial resources from the digital currency market. 

In May, the value of crypto stablecoins experienced a notable decrease, reaching its weakest point since September 2021. These figures were in a report by CCData, a digital investment data company, where it mentioned the downward tendency has persisted since March 2022.

Persistent Decline in Crypto Stablecoin Market Raises Concerns of Financial resources Outflow from Digital Assets

Crypto Stablecoins, a subset of digital currencies, are designed to sustain a stable value by pegging themselves to external assets, predominantly the United States dollar. 

Crypto Stablecoins are important for enabling digital currency trading and connecting traditional government- announced currencies with blockchain-based markets. Nonetheless, the decreasing crypto stablecoin market has raised concerns between analysts, as it signifies a fall in liquidity within the cryptocurrency ecosystem.

Tom Dunleavy, a macro analyst, thinks that “ Crypto Stablecoins are the liquidity of the cryptocurrency ecological system. The more liquidity, the more capacity for financing and speculation,”

Regardless of the growing number of applications, the continuous reduction in crypto stablecoin market capitalisation implies that the cryptocurrency market is still wrestling with the challenges of a long-lasting bear market.

Major financial institutions, such as JPMorgan and Goldman Sachs Group, have likewise highlighted the impact of the shrinking crypto stablecoin market on digital currency prices. JPMorgan’s report states that a sustained recovery in digital currency prices is unlikely until the crypto stablecoin market stabilizes. 

Goldman Sachs Group sees the shrinking crypto stablecoin market as some kind of tightening in the cryptocurrency market, suggesting that there is less money available for trading and borrowing.

Along with the decline in market cap, trading with crypto stablecoins on centralized exchanges has likewise experienced a whole lot of slump. 

Reports by CCData’s report, volume of trading with crypto stablecoins plummeted by 40.6 percent these 30 days, reaching its lowest monthly volume since December 2022. This decline in trading activity coincides with the stagnation of major cryptocurrency assets, which have struggled to break key support and resistance levels.

Amidst this overall market contraction, one crypto stablecoin, TrueUSD (TUSD), has defied the tendency and experienced growth in volume of trading. TUSD’s volume of trading has surged to $29 Billion these 30 days, surpassing struggling competitors like USDC and BUSD. 

This remarkable performance can be attributed to Binance Crypto exchange, the world’s leading cryptocurrency exchange, which has actively promoted TUSD by waiving trading charges for buying and selling Bitcoin (BTC) with the stablecoin.

JPMorgan Chase & Co Analyst Expresses Concerns Over Cryptocurrency Market Recovery Amid Shrinking Crypto Stablecoin Ecosystem

In a recent correspondence to clients, JPMorgan Chase & Co analyst Nikolaos Panigirtzoglou shared apprehensions regarding the longstanding viability of progress in the cryptocurrency market in the year, emphasizing the must address the declining crypto stablecoin ecosystem. 

Regardless of the notable 61 percent boost in Bitcoin (BTC) and the 50 percent surge in Ethereum (ETH) thus far, both digital currencies continue to remain considerably lower than their peak in November 2021, primarily attributed to increased regulatory scrutiny and high-profile bankruptcy cases.

Panigirtzoglou emphasized the significance of crypto stablecoins, which are tied to reserve assets, as they serve as the equivalent of cash within the cryptocurrency ecological system. These crypto stablecoins, such as Tether (USDT) and USD Coin, enable traders to transact in numerous digital currencies without relying on traditional fiat currencies.

The JPMorgan Chase & Co analyst considered a bunch of factors to be in charge of the decline in the crypto stablecoin market, including the regulatory crackdown on cryptocurrency in the United States, disruptions in banking networks supporting the cryptocurrency ecological system, and the repercussions of the FTX Trading Ltd collapse over the past  year.

Panigirtzoglou highlighted that the market cap of major crypto stablecoins has  dropped by nearly $60 Billion since reaching a peak of $186 Billion in May 2022, with a whole lot of portion of the decline attributable to the Terra (LUNA) ecological system collapse. Regardless of this, crypto stablecoins have gained popularity rapidly, seeing as their market share was less than $30 Billion at the beginning of 2021 and only around $5 Billion at the start of 2020.

The growth of the crypto stablecoins, reports by the note, serves as an indicator of the flow of money betwixt the cryptocurrency ecological system and traditional fiat currencies. Digital currencies and crypto stablecoins are interconnected in this regard.

Panigirtzoglou likewise raised concerns about the composition of crypto stablecoin reserves, which increasingly consist of Treasury securities. In the event of a United States technical default, maintaining the pegs of crypto stablecoins could become a whole lot of challenge. Such a scenario could have far-reaching implications for the entire cryptocurrency ecological system, as crypto stablecoins play a critical role in facilitating trading, (DeFi), and serving as collateral.

Panigirtzoglou’s analysis implies that the stability and growth of the cryptocurrency market are closely tied to the stability of the crypto stablecoin universe, making it essential to address the ongoing decline in crypto stablecoin market cap.

Sharks and Whales Accumulating Crypto Stablecoins – Bullish for Bitcoin?

A whole lot of development has been observed in the digital currency market, where sharks and whales are actively augmenting their holdings of major crypto stablecoins such as USD Coin (USDC), Dai (DAI), and Binance Crypto exchange USD (BUSD). 

This insight comes from Santiment, an on-chain analytics company that analyzed the “Supply Distribution” metric. This metric outlines the percentage of a digital currency circulating supply held by different wallet groups.

14 Months of Decline: Stablecoin Market Raises Concerns of Capital Outflow

1 group of wallets that distinguished is those holding betwixt 100,000 and 10 Million coins. Since these crypto stablecoins are tied to the United States dollar, this range translates to holdings worth $100,000 to $10 Million. Seeing as the whole lot of value involved, it’s likely that these wallets belong to the major investors known as sharks and whales.

The influence of these investor groups should not be underestimated, as their capacity to transact large quantities of coins simultaneously can have a whole lot of impact on the market. 

Typically, investors turn  to crypto stablecoins to mitigate the volatility associated with assets like Bitcoin. This is why, the accumulation of crypto stablecoins by these major investors suggests a recent shift away from other assets in search of stability and predictability.

These investors may transform crypto stablecoins back into volatile assets like Bitcoin (BTC) when they see favorable market conditions. The accumulated reserves of crypto stablecoins held by sharks and whales may be a catalyst for injecting financial resources into the Bitcoin (BTC) market, making it an interesting tendency to watch.

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