Stablecoins are targeting multiple trillion-dollar industries.

Written by: Juan Leon, Ari Bookman, Bitwise

Translated by: Luffy, Foresight News

The Bitwise research team releases a quarterly (cryptocurrency market review), analyzing the most important fundamentals and trends impacting the crypto market based on data. The Q3 market review is very exciting.

On one hand, cryptocurrency prices are stagnant, and the market has been consolidating for most of the past six months.

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

We just want to reveal one aspect of this progress: stablecoins are 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 levels of the U.S. House of Representatives and Senate are discussing stablecoins. Last week, payment processing giant Stripe announced that it is planning to acquire the stablecoin issuance platform Bridge for $1 billion, the largest acquisition in the cryptocurrency space to date.

So, what makes stablecoins so valuable? Why should investors pay attention to them?

Unlike other crypto assets, stablecoins are designed to maintain a stable value relative to a certain asset (usually the U.S. dollar). If you see price fluctuations in stablecoins, something must be wrong. This reduces their attractiveness as investment targets, 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, but they are also fast, efficient, and programmable. You can send $10,000 to anyone in the world in seconds without worrying about banking hours or lengthy settlement times. As digital assets, stablecoins can be programmed to execute smart contracts, enabling automatic payments, custody services, and various decentralized finance (DeFi) applications.

This is why the usage of stablecoins has skyrocketed 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 transactions, source: Bitwise Asset Management, Coin Metrics. Data ranges from Q1 2020 to Q3 2024. Note: 'Others' include 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 absorb dollars (or other fiat currencies) and issue an equivalent amount of stablecoins. They then use these fiat currencies to purchase U.S. Treasury bonds and other yield-bearing assets. Finally, they pocket the interest income.

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

These issuers are becoming major players. As shown in the chart, 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 to the U.S. Treasury market, benefiting the broader financial system.

Investors are eager to participate. Tether's biggest competitor, Circle, is more than happy to assist investors, as the company quietly applied for an IPO this year. Additionally, publicly traded companies like Visa have already planned to integrate stablecoins into their businesses.

Stablecoins in U.S. Treasuries and major foreign holders, data from the U.S. Department of the Treasury and corporate reports. Data as of June 30, 2024.

What opportunities should investors seize?

So how should investors seize this opportunity?

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

So, what opportunities should investors look for? What risks do they need to be aware of?

1) Publicly traded companies

Some multinational companies are integrating stablecoins into their businesses for competitive advantages. These companies are reflected in the cryptocurrency stock index, such as the Bitwise Crypto Innovators 30 Index. As stablecoins offer lower transaction costs and faster settlement times compared to traditional trading intermediaries, we expect that companies like Visa and PayPal will not be the last to lay out stablecoins, and more banks and payment processors are expected to enter this space.

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 offer some of the profits they derive from Treasury reserves as interest?

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

3) Value accumulation of underlying blockchains

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

Final thoughts

How large 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 account for 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 emerge?

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