The Need for Stablecoins in a Decentralized Market PT. 1

Let’s breakdown the latest from Blockchain Research Lab.

The Need for Stablecoins in a Decentralized Market PT. 1

The cryptocurrency community made history on Friday, February 19th, 2021.

Bitcoin, the world’s most famous decentralized currency, surpassed $1 Trillion market cap.

#CryptoTwitter celebrations go viral for 50K. 

With all the #cryptotwitter celebrations ... it’s easy to lose track of the entire story.

Just five days earlier the entire crypto community watched as  Valentine's Day nearly eneded with a record-breaking $50K.

Instead, the crypto community held its breath as the value of Bitcoin dropped overnight from $49K to $46.7K.

The skeptics began to wonder whether Bitcoin’s value would ever reach $50K.

But the Bitcoin skeptics were (once again) proven wrong, and the world watched Bitcoin’s value break $50K for the first time.

Bitcoin hits 50K in 2021. 

In the days leading up to this historic day in cryptocurrency history ...

.... we couldn’t help but notice the uptick in the amount of U.S.-backed stablecoin activity.

Check this out: 👀👀👀👀




This got the team wondering:

Why, during a “bull run” for a decentralized currency, are U.S.-backed stablecoins buzzing with activity?

Why are stablecoins important to a decentralized market? 

To answer this question, let’s review a recent study from the Blockchain Research Lab.

The Influence of Stablecoin Issuances on Cryptocurrency Markets

The influence of Stablecoin Inssuances on Cryptocurency Markets from Blockchain Research

The Influence of Stablecoin Issuances on Cryptocurrency Markets conducted by Lennart Ante examines the relationship between U.S.-backed stablecoins and decentralized cryptocurrencies.

Here are some brief details about the project:

The report studied seven different U.S.-backed stablecoins. 

Influence of Stablecoin Issuances on Cryptocurrency Markets

Report details:

  1. The project studied 565 issuance events of $1 million or more for seven different stablecoins on four different blockchains.
  2. The study took place over an 11 month period, from April 2019 and March 2020.
  3. U.S.-backed Stablecoins studied: USD Coin (USDC), Huobi (HUSD), Tether USD (USDT), Paxos Standard (PAX), Binance USD (BUSD), DAI (DAI), Gemini USD (GUSD). Each of these stablecoins claim a 1:1 backing with the U.S. Dollar.
  4. The project analyzed the effect of the returns for four different blockchains - Bitcoin, Ethereum, Ripple, and Litecoin.

In order to understand the report findings more clearly, let's breakdown what it means to "issue stablecoins."  

The Issuance of Stablecoins

Stablecoins are issued whenever a person or group of people use blockchain technology to distribute fiat currency (like U.S. dollars).
Stablecoins distribute fiat currency via blockchain technology. 

For example, let’s say someone wants to trade their U.S. dollars for a decentralized currency, like Bitcoin.

The events may look something like this:

A trader's guide to buying cryptocurrency.

For a U.S-backed stablecoin to be minted an issuer must issue a stable token.

For example, USDC is a stablecoin issued by a consortium, called Centre. The issuer (Centre) backs the stable currency (USDC).

In short, to issue a certain number of tokens of a given stablecoin, the issuer must offer dollar reserves worth the same amount as collateral.

Report Findings

The study found there was a positive correlation between stablecoins and the effect of abnormal returns for the decentralized curriences (Bitcoin, Ethereum, Ripple, and Litecoin) observed over the 11 month period.  

The report found stablecoin issuances contribute to price discovery.

Influence of Stablecoin Issuances on Cryptocurrency Markets

Report Findings:

Over the course of 11 months ....

  1. Cryptocurrency market experienced downturns in the week before stablecoin issuance.
  2. Cryptocurrency market experienced abnormal returns in the twenty-four hours around the issuance.

Lennart Ante and his team concluded that stablecoin issuances contribute to both the price discovery and market efficiency of cryptocurrencies.

Stablecoin Issuances are driven by short-term cryptocurrency investors. 

Ante and his team also concluded the demand for newly minted stablecoins is driven by the demand of short-term cryptocurrency investors.

So, Why are short-term cryptocurrency investors demanding stablecoins?

Based on the Blockchain Research Lab's findings, one can conclude - as the value of decentralized cryptocurrencies decreases, short-term cryptocurrency investors demand for newly minted stablecoins increases.


So let’s get back to our original question ...

Question: Why, during a “bull run” for a decentralized currency, are U.S.-backed stablecoins buzzing with activity?

Traders use stablecoins to purchase decentralized currencies. 

Answer: Because stablecoins are used to purchase decentralized currencies at discounted prices.

Whenever the price of cryptocurrencies drops, short-term investors see an opportunity to buy Bitcoin and Ethereum at lower prices using stablecoins.

It’s no wonder, then, U.S.-backed stablecoins have been buzzing with activity lately. On Sunday, February 14th, Bitcoin's value was at $48,000, on Monday, February 15th, Bitcoin dropped to $46,000 and by Friday, February 19th Bitcoin jumped to a record-breaking $56,000.

After the value of Bitcoin dropped to a mere $46,000, short-term cryptocurrency investors saw an opportunity to make money on a Bitcoin investment.

As short-term investors' demand increased, issuers began issuing more stablecoins.

So why, during a “bull run” for a decentralized currency, are U.S.-backed stablecoins buzzing with activity?

One reason is certain - the number of short-term investors using stablecoins to purchase Bitcoin increased.

But short-term investors aren’t the only reason why stablecoins are important.

Stay tuned for more astounding articles outlining the need for stablecoins in a decentralized market.

*Any references to past performance, regarding financial markets or otherwise, do not indicate or guarantee future results. Paymynt Financial is not engaged in rendering any tax, legal, or accounting advice. Please consult with a qualified professional for this type of advice.