Written by: Juan Leon, Ari Bookman, Bitwise

Compiled by: Luffy, Foresight News

The Bitwise research team releases a quarterly (cryptocurrency market review), analyzing the most important fundamentals and trends affecting the crypto market based on data. The third-quarter market review is very exciting.

On one hand, cryptocurrency prices are stagnant, with the market consolidating like much of the past six months.

But on the other hand, as Bitwise Chief Investment Officer Matt Hougan said, 'The calm on the surface hides significant progress underneath.'

We just want to reveal one aspect of this progress: stablecoins becoming the dominant application of crypto technology.

Why should investors pay attention to stablecoins?

Stablecoins are no longer niche; we have been talking about them for many years. Traditional giants like PayPal are launching their own stablecoins. Senior officials in the U.S. House and Senate are discussing stablecoins. Last week, payment processing giant Stripe announced that it plans to acquire the stablecoin issuance platform Bridge for $1 billion, marking its largest acquisition ever in the cryptocurrency space.

So, what makes stablecoins so valuable? Why should investors care about them?

Stablecoins are different from other crypto assets in that they are designed to maintain a stable value relative to a certain asset (usually the dollar). If you see fluctuations in the price of stablecoins, something must be wrong. This reduces their attractiveness as investment vehicles, making them more of a medium for transactions. More importantly, this role makes stablecoins a bridge between traditional finance and the crypto economy.

Not only that, they are fast, efficient, and programmable. You can send $10,000 to anyone in the world within seconds, without worrying about bank hours or lengthy settlement times. As digital assets, stablecoins can be programmed to execute smart contracts, enabling automatic payments, escrow services, and various decentralized finance (DeFi) applications.

This is why the usage of stablecoins has surged to record levels. In the first half of this year, over $5.1 trillion in transactions were conducted through stablecoins, which is not far off from Visa's $6.5 trillion.

Stablecoin trading, data source: Bitwise Asset Management, Coin Metrics. Data ranges from Q1 2020 to Q3 2024. Note: 'Others' includes BUSD, DAI, FDUSD, GUSD, HUSD, LUSD, PYUSD, TUSD, USDK, and USDP.

How did stablecoins take off?

Why did traditional payment giant PayPal launch a stablecoin? The answer is that this business model is too good.

Issuers take in dollars (or other fiat currencies) and issue an equivalent amount of stablecoins. They then use these fiat currencies to purchase U.S. Treasuries and other income-generating assets. Finally, they pocket the interest income.

How effective is this model? The largest stablecoin issuer, Tether, made more profit last year than BlackRock.

These issuers are becoming major players. As shown below, the top five stablecoins hold more U.S. Treasuries than some G20 countries like South Korea and Germany. Therefore, the growth of stablecoins provides a new source of demand for U.S. debt and helps provide liquidity for the U.S. Treasury market; stablecoins benefit the broader financial system.

Investors are eager to get in on the action. Tether's biggest competitor, Circle, is happy to assist investors, as the company quietly applied for an IPO this year. Additionally, public companies like Visa are planning to integrate stablecoins into their businesses.

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

What opportunities should investors seize?

So how can investors seize this opportunity?

Remember: stablecoins do not appreciate; they will bear the same inflation pressure (and currency exchange risk) as the assets to which they are pegged.

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

1) Public companies

Some multinational companies are integrating stablecoins into their businesses to gain a competitive edge. These companies are reflected in cryptocurrency stock indices, such as the Bitwise Crypto Innovators 30 Index. Because stablecoins offer lower transaction costs and faster settlement times than traditional trading intermediaries, we expect companies like Visa and PayPal will not be the last to enter the stablecoin space; more banks and payment processors are expected to follow.

2) Potential alternatives to money market accounts

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

If this path is opened, stablecoins could become an attractive alternative to money market funds (a $6.3 trillion industry). For advisors with cash on hand, stablecoins might become a useful tool in portfolios. Given that stablecoin regulation is a hot topic in the U.S. Congress, this is worth paying attention to.

3) Value accumulation of the underlying blockchain

Most stablecoin activity occurs on Ethereum. The growth of stablecoins directly contributes to the growth of the network and indirectly drives the price of ETH. Of course, the reverse is also true: if stablecoins fail, it could pressure network activity.

Final thoughts

How big can the scale of stablecoins be? Just imagine:

The total amount of liquid deposits in the U.S. is about $18 trillion. Currently, stablecoins only represent 1% of that market size. What changes might we see in relative market share if we see large-scale interest-bearing stablecoins approved or clearer regulatory frameworks established?

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