Key Takeaways

• The total supply of stablecoins has fallen every month since UST collapsed in May 2023
• Last month saw another $1.7 billion of outflows, the total supply now 33% off its peak
• Tether’s market share has increased amid stuttering rivals, but all other coins have seen large drawdowns
• Liquidity and volume in the space overall is thin and continues to fall

If one wanted to sum up the past few years in crypto, the stablecoin market would be a good place to start. 

The branch of the industry so important for liquidity has been heavily dented, with the total supply of stablecoins on the market now less than $125 billion. That represents a 33% decline from the peak of $188 billion, on the eve of the Terra collapse last May.

Since that infamous Terra meltdown, which saw the $18 billion UST not-so-stablecoin evaporate into thin air, the market has continued to pare down. In line with a tightening in financial conditions across the economy, the stablecoin supply has been reduced every month since. 

Last month saw another $1.7 billion reduction, the third largest of 2023. 

Tether market share increases 

To track the movements closer, you can hit “play timeline” on the below chart. Breaking down the overall supply into the largest stablecoins, nearly every coin has been hit hard. Nearly, that is, because there is one glaring exception: Tether. 

Somewhat ironically, given its long-debated cloudy reserves, Tether has re-established an absolutely dominant market share. Benefitting not only from the aforementioned demise of UST, but also the regulatory shutdown of BUSD ion February and the SVB-related fear (albeit brief) surrounding USDC in March, the Europe-based stablecoin has managed to avoid the harsh regulatory crackdown in the US and hoover up some of the capital fleeing rivals.

Its market share currently sits at a colossal 67%. With a market cap of $83 billion, the company revealed it generated an astonishing $1 billion in operating profit in Q2 alone, mainly due to the stout yields currently on offer through US Treasurys. 

Yet aside from Tether being well placed to take advantage of the obstacles that have suppressed rivals, the stablecoin market overall demonstrates the trouble of the cryptocurrency at large. 

Liquidity and volumes have collapsed, with volatility accordingly close to all-time lows. The capital flight of the space has been immense, as a tight monetary environment coupled with numerous scandals within the crypto space has hurt a sector which expanded rapidly during the zero-rate, money-printing bonanza of the COVID period. 

Where does the market go from here?

While the decimation in liquidity and volume is obviously a stark negative for the space overall, there have also been silver linings. 

The lack of volatility is welcome in some quarters, with the industry beset by multiple scandals last year, headlined by the FTX crisis in November. 2023 has thus far been marked by slow and muted market conditions. That is not ideal for traders and market makers, but for the reputation of the industry, at least the scandals of last year and the fallout of reckless risk management amid a suddenly-tightening economy appear to have subsided.  

Of course, there remains the matter of the largest cryptocurrency exchange on the planet, Binance, facing a litany of lawsuits. They allege everything from circumventing AML and KYC laws to manipulating volume and trading against customers. Without doubt, much of the space still operates in a highly opaque manner, so perhaps it’s foolish to declare those shocks a thing of the past.

Yet, either way, the trajectory of the space feels like it won’t shift until wider macro conditions allow it the slack to do so. The motive to hold a stablecoin, or invest in crypto in general, is far lower when US government-guaranteed bonds offer more than 5%. The risk-reward position is simply entirely transformed. 

With that said, there does appear to be hope that the tightening of rates is finally coming to a close. Looking at probabilities backed out by Fed futures, the market is anticipating a maximum of one more (if even that) rate hike before the Fed calls it quits. 

Perhaps then capital will be less hesitant to start looking towards this nascent asset class again. However, if one wants to get a quick gauge of how the crypto space has fared over the past couple of years, the stablecoin market is telling.