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Stablecoin Demand Grows After Silvergate Exodus

The crypto market is in a slump, and investors are flocking to USDT and USDC.

Photo by CoinWire Japan / Unsplash / Blockhead

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Following the collapse of the crypto-focused bank Silvergate Capital, investors are flocking to dollar-equivalent tokens as a kind of alternative currency. This is happening even though the crypto market as a whole is in a slump.

More so after the US Securities and Exchange Commission (SEC) was unsuccessful in its fight against Binance and is now under attack for its investigation into stablecoins.

The Commodity Futures Trading Commission (CFTC) has decided that stablecoins are commodities and not securities, ending a heated debate on the subject.

According to price data collected by CoinGecko, the amount of trading for the two stablecoins with the most market capitalization, Tether's USDT and Circle's USDC, has gone up.

Stablecoins, or "stable tokens," are digital tokens that strive to maintain a value that is equal to that of a less volatile asset, such as the US dollar.

Investors should always be able to convert their stablecoins into dollars at crypto exchanges or with the token issuer because most of them do so by keeping large amounts of collateral made up of cash and cash equivalents.

Markus Thielen, head of research at Matrixport, noted, "We have seen an increase in stablecoin activity as a sign that crypto firms are using crypto rails to move money around."

He claimed the increased activity shows that crypto dealers are resorting to digital assets as an alternative to traditional financing, given that they are now unable to clear through Silvergate’s Exchange Network.

Stablecoin reserves on exchanges are also growing, suggesting traders and companies are hoarding dollars in digital assets on exchanges as a haven during the volatility.

Dollar's Supremacy in Crypto Market Eroding

Silvergate became the first US bank casualty of the FTX collapse and the crypto market crisis after the company decided to shut down its business on Wednesday.

As the number of payment providers in the US drops, it gets harder for crypto firms to use US dollars to buy digital assets.

According to research published by blockchain analytics firm Kaiko, stablecoins with their value fixed to dollars remain the cornerstone of the crypto market, but the dollar's influence has been eroding since the FTX exchange's demise.

Since November, the market share of Bitcoin trading pairs that use dollars has been going down, while the market share of Bitcoin trading pairs that use the euro, Tether, and USDC has been going up.

Even though the crypto industry has hated banks for a long time, traditional lenders play an important role as a safe way to switch between crypto platforms and regular money. Unfortunately, banks in the US are rapidly cutting out crypto companies.

Since Silvergate Capital Corp.'s crypto payment network is ending, the research shows that traders will soon use stablecoins even more.

Stablecoins are digital tokens that are pegged to a stable currency at a 1:1 ratio.

Yet stablecoins may not be the answer in the long run, according to Kaiko, because many stablecoin issuers today still require the services of a crypto-friendly bank like Silvergate.

The research concluded that "the risk is now further concentrated" as a result.

Tether Stabilises the Shaky World of Stablecoins

But Tether has tightened its grip on the wobbling world of stablecoins.

US regulators said Binance's stablecoin was an unregistered security, so the New York-based company that mints BUSD tokens, Paxos Trust Company, said it would stop minting new BUSD tokens.

Tether (USDT), which is now the market leader, gained a lot from this news. As a result, its market value went up by $1.9 billion to $70.3 billion. As of now, it controls 52.6% of the stablecoin market, up from slightly over 51% before.

Even though this probably shook up the $137 billion market, the CFTC's announcement on Wednesday that cryptocurrencies like Ether and stablecoins should be treated as commodities instead of securities may make these tokens even more popular.

Stablecoins play an important role in the cryptosphere because of the ease with which they can be converted to and from other cryptocurrencies or fiat currencies.

As traders use these coins for hedging, their depreciation is a reflection of the general crypto market's declining liquidity and leverage.

While BUSD is mostly used for trading on Binance, the world's largest crypto trading platform, it has relatively little usage elsewhere in the crypto sector.

Tether has emerged as the winner among stablecoins in recent weeks.

Bitcoin Investors Turn to Smart Tokens

Separately, a Reuters report noted that some cryptocurrency enthusiasts, drawn in by the promise of rapid inflation, have abandoned the digital asset that was originally established as an alternative to fiat money.

They are now in favour of the tokens developed as the native currency of blockchain platforms that host smart contracts and applications.

While the price of bitcoin increased by 33% in 2023, the MarketVector Smart Contract Leaders Index (which measures important tokens of this sort) increased by 36% in the same time period.

This year, the value a Solana token has increased by 76%.

The CEO of a cryptocurrency investment firm, Bundeep Rangar, predicted that smart contract tokens on platforms that allow decentralised finance (DeFi) apps will provide the highest profits.

He added, "those are ones that you will find capital appreciation, similar to what a growth stock will be."

CoinShares data reveals that investment products tracking ether and solana have received tiny inflows while investment products tracking bitcoin have suffered four weeks of withdrawals, suggesting that some investors in the $1 trillion digital assets industry tend to agree.

Seven of the 20 largest crypto assets are smart contract tokens, and they include Ether, Chainlink (DOT), Solana, and Cardano (ADA).

In addition, Bank of America analysts compared smart contract tokens and the blockchain-based applications they enable to growth stocks in the equities market, namely technology shares.

BofA analysts wrote in a research note, "We expect 2023 to be the year of token price divergence."

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