Original title: Could Stablecoins Put an End to Money Market Accounts?

Original author: Juan Leon, Ari Bookman, Bitwise

Original translation: Luffy, Foresight News

The Bitwise research team publishes the "Crypto Market Review" every quarter, analyzing the most important fundamentals and trends affecting the crypto market based on data. The market review for the third quarter is very exciting.

On the one hand, cryptocurrency prices have not improved at all, and the market has been sideways like it has for most of the past six months.

But on the other hand, as Bitwise Chief Investment Officer Matt Hougan said, "The calm on the surface masks the huge progress behind it."

We only want to reveal one aspect of these developments: stablecoins have become the dominant application of crypto technology.

Why should investors pay attention to stablecoins?

Stablecoins are no longer niche, we’ve been talking about them for years. Traditional big companies like PayPal are launching their own stablecoins. Stablecoins are being discussed at the top level of the U.S. House of Representatives and Senate. Last week, payment processing giant Stripe announced that it is planning to acquire stablecoin issuance platform Bridge for $1 billion, its largest acquisition in the cryptocurrency space ever.

So what makes stablecoins so valuable? And why should investors care about them?

Stablecoins are designed to maintain a stable value relative to an asset (usually the U.S. dollar), unlike other crypto assets. If you see a stablecoin’s price fluctuate, something is wrong. This makes them less attractive as an investment target and more of a medium of exchange. More importantly, this role makes stablecoins a bridge between traditional finance and the crypto economy.

Not only that, they are also fast, efficient, and programmable. You can send $10,000 to anyone in the world in seconds without having to worry about banking hours or long settlement times. As digital assets, stablecoins can be programmed to execute smart contracts, enabling automated payments, escrow services, and a variety of decentralized finance (DeFi) applications.

That’s why stablecoin usage is surging to record levels. In the first half of this year, more than $5.1 trillion in transactions were conducted globally via stablecoins, which is not far behind Visa’s $6.5 trillion.

Stablecoin transactions, source: Bitwise Asset Management, Coin Metrics. Data ranges 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 did traditional payment giant PayPal launch stablecoins? The answer is that this business model is too good.

Issuers absorb US dollars (or other fiat currencies) and issue an equal amount of stablecoins. Then they use these fiat currencies to buy US Treasuries and other yield assets. Finally, they pocket the interest.

How does this model work? Tether, the largest stablecoin issuer, made more profit than BlackRock last year.

These issuers are becoming big players. As shown in the chart below, the total amount of U.S. Treasuries held by the top five stablecoins exceeds that of some G20 countries such as South Korea and Germany. Therefore, the growth of stablecoins provides a new source of demand for U.S. debt and helps provide liquidity to the U.S. Treasury market, which is good for the broader financial system.

Investors can't wait to get in on the action. Tether's biggest competitor, Circle, is happy to help investors, and the company quietly filed for an IPO this year. In addition, public companies such as Visa are already planning to integrate stablecoins into their businesses.

Stablecoins and major foreign holders of U.S. Treasuries, data from the U.S. Treasury and company reports. Data as of June 30, 2024.

What opportunities are there for investors to seize?

So how can investors seize this opportunity?

Remember: stablecoins will not appreciate, and they will be subject to the same inflationary pressures (and currency conversion risks) as the assets they are pegged to.

So, what opportunities should investors look for? What risks should they be wary of?

1) Publicly traded companies

Some multinational companies are integrating stablecoins into their operations to gain a competitive advantage. 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 transaction intermediaries, we expect that companies such as Visa and PayPal will not be the last to deploy stablecoins, and more banks and payment processors are expected to enter this field.

2) Potential alternative to money market accounts

For most stablecoin holders today, the stablecoins they hold are similar to cash in a checking account: there is no interest. But what if issuers could take part of the profits they make from treasury reserves as interest?

If this path is opened, stablecoins will become an attractive alternative to money market funds (a $6.3 trillion industry). For advisors whose clients have cash on hand, stablecoins may become a useful tool in the portfolio. As stablecoin regulation is a hot topic in the US Congress, this is worth watching.

3) Value Accumulation on the Underlying Blockchain

Most stablecoin activity occurs on Ethereum. Stablecoin growth directly drives network growth and indirectly drives ETH’s price. Of course, the reverse is also true: if a stablecoin fails, it could weigh on network activity.

Final Thoughts

How big can stablecoins get? Consider this:

Total liquid deposits in the U.S. are about $18 trillion. Currently stablecoins account for only 1% of that market. What happens to relative market share if we see large-scale interest-bearing stablecoins approved or a clearer regulatory framework?

For investors, the signal is clear: now is the time to pay attention to stablecoins.

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