I conducted a thorough analysis of the deluge of stablecoins departing exchanges a few months ago.
The exodus shows no signs of slowing down as of this moment. In just five months, $22.8 billion, or more over half of the stablecoins that were fully available on exchanges, have been lost.
The withdrawals started in the fall of last year, following the demise of FTX, as the above chart indicates. During this time, Binance also came under fire for how opaque its business practices were.
Some outflows have clear definitions. The SEC filed a lawsuit against the BinanceUSD issuer SEC in February for violating securities laws. As a result, the Binance-branded stablecoin could no longer exist, and its market cap was slated to gradually sink to zero.
Additionally, there have been issues with Circle’s USD Coin, a stablecoin with US jurisdiction. First off, because it is situated in the US, there are worries that authorities will show up for the same reason Paxos went bankrupt. However, the collapse of Silicon Valley Bank, which held 8.25 percent of the reserves backing USD Coin, was more dramatically dramatic.
Although the SVB scandal resulted in the US government guaranteeing deposits, it did briefly drive the USDC peg all the way down to 92 cents, accelerating the outflows of a USDC market cap that was already declining.
In truth, compared to before the FTX collapse in November, all of the most significant stablecoins have experienced significant outflows from exchanges:
Increasing market share for Tether
Even Tether experienced massive outflows, with a 30% decrease in stability. That is true despite the fact that the market share of the biggest stablecoin in the world, which was previously examined in a knowledge piece, is currently at its highest level in more than two years.
In my in-depth analysis from two weeks ago, I examined the ramifications of Tether’s growing market share for the entire cryptocurrency industry; yet, while its market share may be growing, its exchange stability is still declining, in line with the rest of the stablecoin family.
Actually, it extends beyond stablecoins. Liquidity in other parts of the crypto market may also be declining. Since the previous bull market peak in 2017, the Bitcoin supply on exchanges is at its lowest level ever. Ethereum is the same, with ETH’s stability at a 5-year low.
When one steps back and considers what has happened in the cryptocurrency industry, this makes sense.Beyond the issues specific to stablecoins that have already been mentioned, the market has been utterly destroyed.
A number of scandals have rocked the nation, including those involving LUNA, Celsius, and FTX, to name a few. Regulators are quickly taking action against some of the biggest players in the industry. The more general macro environment is the most harmful of all; last year saw the Nasdaq lose a third of its value, which was its lowest return since 2008. Given that Bitcoin was just introduced in 2009, this amounted to the first significant and prolonged slump in broader markets in the brief history of cryptocurrency.
Liquidity should be transparently represented by a view of what has happened to Treasury yields. At the end of the day, interest rate increases aim to slow down the financial system and drain the system of liquidity, helping to control inflation.
Is it any wonder that liquidity is rushing out of a sector that has seen controversy to the same degree as cryptocurrency has, with fees on Treasurys skyrocketing from 0% to north of 5%?
Max Coupland, director of CoinJournal, claimed that “liquidity has evaporated from the cryptocurrency house at giant.” “Treasury yields are above 5%, but institutions have stopped providing finance as a result of the FTX and LUNA scandals.
Increased volatility results from tight liquidity.
The flip side of that is that lower liquidity makes it easier to move the price, emphasizing strikes to both the upside and downside. This may have contributed to the build-up thus far this year.
Costs have started to rise once more as a result of the market shifting to weaker predictions on the longer-term trajectory of interest rates. This has been aggressive in the cryptocurrency world, with Bitcoin up 68% so far this year and most other currencies reporting similarly lofty figures.
Volatility is inevitably increasing as a result of the decreasing availability of both Bitcoin and stablecoins on exchanges.