The sharp selloff in the cryptocurrency market on Tuesday – which saw Bitcoin (BTC), Ether (ETH), Cardano (ADA), and Solana (SOL) plummet in double digits – created a place for stablecoins to establish themselves. Deserve.
Fixed-rate cryptocurrencies have provided traders with temporary protection from the price volatility of the notorious cryptocurrency. They did this by keeping their currency virtually pegged to the dollar and offering enough liquidity to traders who were looking for a safety net during a market downturn.
Blockchain analytics service CryptoQuant reported a spike in stablecoin transfers as the cryptocurrency market cap fell from $2.38 trillion to $2.103 trillion on Tuesday.
For example, Tether (USDT), the leading stablecoin by volume, handled $10.51 billion in transactions on Tuesday, compared to $4.02 billion on Monday.
Similarly, the second largest US dollar stablecoin (USDC), backed by Circle, recorded $5.728 billion in transfers on Tuesday versus $3.27 billion in the previous session, posting a 74% increase.
At the same time, the net supply of stablecoins in circulation remained relatively idle, at around $67 billion, showing sufficient liquidity against demand even in the face of a brutal decline in the cryptocurrency market. As a result, many stablecoins have maintained their peg to the dollar despite recording slight price deviations.
A more reliable centralized stablecoin
Among the top 10 stablecoins that showed an average deviation from their one-dollar peg, six are central projects, two hybrid projects, and two algorithm projects.
USDC bid pushed its average valuation around $0.00196 above the dollar, followed by Paxos (PAX), which traded above $0.00203 above the same peg.
Likewise, the native stablecoin of Binance exchange, Binance USD (BUSD), and MakerDAO’s Dai has maintained its stability through a dynamic system of collateralized debt positions, independent feedback mechanisms, and a variety of user incentive structures.
The broader demand for Tether across the cryptocurrency spectrum also drove the average deviation up by $0.00244.
Related: Tether promises audit within ‘months’ as Paxos claims USDT is not a true stablecoin
Meanwhile, TrustToken’s TUSD, Stable Universal’s HUSD, and Terra’s UST deviated from $0.00249 to $0.00385 from their dollar valuation. Both FRAX and FEI recorded a break from their currency peg to the dollar by jumping above $0.00404 and $0.00474, respectively.
The data snapshot was taken 24 hours after the crypto market crash on Tuesday.
Is a stablecoin crash good for bitcoin?
But potential stablecoin risks have also caught the attention of senior US officials, including Treasury Secretary Janet Yellen and Boston Federal Reserve Bank President Eric Rosengren.
In July, Yellen emphasized “the need to move quickly to ensure an appropriate regulatory framework for the United States” in a meeting with the chairs of the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
Related: Stablecoin Growth May Impact Credit Markets, Rating Agency Warns
Meanwhile, Rosengren described Tether as a potential challenge to financial stability.
In July, a paper by Fitch Ratings also noted that collateralized stablecoins could lead to short-term credit market contagion:
“A sudden collective redemption for [tether] Can affect the stability of short-term credit markets […] Especially if it relates to broader redemptions of other stablecoins that hold reserves in similar assets.”
But what could the collapse of the stablecoin market mean for Bitcoin and similar digital assets? This will benefit Bitcoin in particular, said Mike McGlone, chief commodity strategist at Bloomberg Intelligence.
“If the entire market collapses, there is only one safe store of value left: Bitcoin.”
For more information on the potential risks of stablecoins, check out Cointelegraph’s latest video report.
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