Many traders are choosing eggs for their money, or in this case: stablecoins for their cryptocurrency. When the market is in a downtrend, investors and traders usually protect their value by selling crypto for stablecoins. This is not only true in theory, but can also be substantiated numerically.
What are stablecoins?
Before we dive into the numbers, a quick word on what stablecoins are. A stablecoin is a crypto currency with a value linked to a fiat currency. This could be, for example, the euro or the dollar. For example, there are many crypto currencies that are worth exactly 1 dollar.
Stablecoins are mainly used on cryptocurrency exchanges. In fact, it can be a way to hedge against price fluctuations. It works like this:
Suppose the rate of bitcoin is currently 20 thousand dollars. You expect the price to drop. At that point, you may choose to exchange bitcoin for a stablecoin such as USDT.
Does the price then drop to 10 thousand dollars? Then you still have 20 thousand dollars in digital currency. If you expect bitcoin to rise again, you can then exchange the stablecoin for bitcoin again.
The dominance of stablecoin shows the share of stablecoins in the total cryptocurrency market capitalization. In the long run, the dominance of stablecoins is rising, and this is really only interrupted by short periods during bull markets.
Dominance of stablecoins increases
Since the bitcoin price reached its last all time high on November 10, 2021, the dominance of stablecoins is rising as many wanted to hedge against the risk of bitcoin falling.
This month, the dominance of stablecoins increased from 13% to 18% as the crypto market is in a free fall.
This is exemplary of the behavior of traders during market turmoil. They are well finding their way into stablecoins and this is made visible this month by the blue arrow in the chart above.
Bitcoin dropped from 30 thousand dollars to 20 thousand dollars and many traders managed to weather this storm by moving their value to stablecoins.
Market capitalization is not increasing
Yet stablecoin’s total market capitalization did not change in June and is still around $160 billion, which tells us that the sharp rise in stablecoin’s dominance is caused by the rest of the market falling, while stablecoins have done what they are supposed to do: maintain their value.
Can USDC knock Tether off its throne?
Another interesting dynamic in the stablecoin market is that USDC continues to steal market share from USDT. USDC’s market capitalization is up 28% in 2022, while USDT’s is down 9%.
If these growth rates continue, USDC will surpass USDT as the largest stablecoin by the end of this year. Currently, USDC’s market capitalization is $54 billion and USDT’s is $71 billion.
Stablecoins perform a limited function on exchanges, and are mainly focused on the short term. This is because this type of crypto currency is still linked to fiat currencies such as the euro and the dollar.
This is diametrically opposed to the principle of a digital decentralized currency like bitcoin. But in the short term, it can certainly be a solution for cryptocurrency traders.