Investors push stablecoins over $9 billion – Will crypto prices soon rise?

One year ago, stablecoins were little more than a novelty, a convenient place to store funds in advance of investment and a convenient tool for quickly and cheaply moving funds between various crypto exchanges. At that time, roughly $3 billion had been placed in these tokens, the lion’s share going to Tether’s issuance of “USDT”. Today, balances exceed $9 billion with Tether still commanding about an 85% share of the proceeds. In fact, within the last month, nearly $3 billion has rushed into these “stores of value”, but the questions are “why” and will these funds impact prices going forward?

The above chart depicts the sudden rise in stablecoin usage over the past two years. The last two weeks witnessed more deposits and transfers, which caused the total value to climb above $9 billion. There was a time in 2019 when stablecoin increases were thought to be a precursor to investment in Bitcoin and other altcoin brethren, but most analysts attribute the recent escalation to a flight to safety due to the COVID-19 pandemic.

Whatever the true reasons are for investors rushing to buy stablecoins, $9 billion could easily purchase over one million Bitcoins, but times have changed, as has the makeup of investors and how they prefer to operate. Gone are the times when miners were the major owners of this convenient tool, when the market could anticipate a sudden rush to reinvest in cryptos at the next dip in prices.

Mike Co, an analyst at Coinbase, recently penned on his firm’s blog a rather lengthy analysis of how the stablecoin market has emerged and is evolving over time. His primary take is that: “Today, the primary uses for stablecoins are as a haven from cryptocurrency volatility and as a bridge for value transfer between exchanges. In addition, evidence of stablecoins’ use in global commerce, traditional financial settlement, and as collateral for decentralized finance is emerging.”

As for whether all of this crypto cash on the sidelines is a harbinger for severe price appreciation in the near term, two researchers at the University of Berkeley released a study, which does not confirm this line of reasoning. In their report, Richard Lyons, U.C. Berkley’s chief innovation and entrepreneurship officer, and Ganesh Viswanath-Natraj, assistant professor of finance at the Warwick Business School, discovered that the use of stablecoins offered a convenient way to react to market movements, but they did not act as “as drivers of price inflation or collapse”.

Their study refuted previous reports that had suggested that stablecoin purchases did eventually contribute to a rise in crypto prices. The pair of academics summarized their conclusions as follows: “We find no systematic evidence that stablecoin issuance affects cryptocurrency prices. Rather, our evidence supports alternative views; namely, that stablecoin issuance endogenously responds to deviations of the secondary market rate from the pegged rate, and stablecoins consistently perform a safe-haven role in the digital economy.”

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