The stablecoin market has been experiencing a decline for the past 14 months, which is indicative of a reduction in capital flowing through the digital asset space, and this is a concerning trend for the recovery of cryptocurrency prices. According to a market report by digital asset data firm CCData, the total market capitalization of stablecoins decreased to $130 billion in May, marking the lowest level since September 2021, and this downward trend has persisted since March 2022.
Stablecoins are a specific type of cryptocurrency that is designed to maintain a fixed value relative to an external asset, most commonly the U.S. dollar, and they serve as a critical infrastructure for the digital asset ecosystem by facilitating cryptocurrency trading and connecting government-issued fiat currencies with blockchain-based markets.
According to analysts, the contraction of the stablecoin market presents a challenge for cryptocurrency prices, as it implies a decline in liquidity. Tom Dunleavy, a macro analyst, highlighted in a note to CoinDesk that stablecoins are the primary source of liquidity for the digital asset ecosystem, and a reduction in liquidity, despite the increasing number of applications, suggests that the market is still grappling with the challenges of a prolonged bear market.
In a report released last week, JPMorgan, a prominent banking institution, opined that cryptocurrency prices are unlikely to experience a sustained rebound until there is a halt in the contraction of the stablecoin market. Similarly, earlier this year, global investment bank Goldman Sachs noted in a report that the decline in stablecoin market size is comparable to a form of quantitative tightening for the cryptocurrency market, which implies diminishing liquidity and leverage.
The CCData report has indicated that trading activity involving stablecoins has declined significantly, with a 40.6% drop in volume to $460 billion on centralized exchanges this month, marking the lowest monthly volume since December 2022. The report suggests that the decrease in trading volume is due to significant digital assets remaining range-bound and failing to surpass crucial support and resistance levels.
According to CCData, TrueUSD (TUSD), a stablecoin, has experienced a noteworthy surge in trading volume, reaching $29 billion thus far this month, despite the general market slump. TUSD has surpassed its struggling competitors, USDC and BUSD, and has become the second most traded stablecoin on centralized exchanges for the first time. This resurgence in TUSD’s popularity can be attributed to Binance, the world’s leading cryptocurrency exchange by trading volume, which has promoted the token’s use on its platform by waiving trading fees for buying and selling bitcoin (BTC) with TUSD.
