The crypto market has been a rollercoaster ride for investors for several years now. After reaching the all-time high in 2017, cryptocurrencies have been in a downward spiral since then. Since the pandemic hit in 2020, Bitcoin and other cryptocurrencies have faced market volatility like never before, which has made it challenging for investors to form any plan of action. While Bitcoin has shown some stability in recent times, it will be hard to predict any significant crypto recovery in the future.
One of the main factors that make it difficult to predict a crypto recovery in the long run is the shrinking stablecoin universe. According to one analyst, as the stablecoin market shrinks, there will be an even more significant impact on the overall crypto market’s recovery. Stablecoins are digital currencies that are linked to real-world assets such as fiat currencies or commodities like gold or silver. They are used as a hedge against market volatility and offer a stable value that provides traders with a safe harbor in turbulent times.
The stablecoin market is an essential part of the crypto ecosystem as it provides stability and liquidity in times of market volatility. However, as the stablecoin market shrinks, it will be harder for investors to find a safe haven in the crypto market, which will have a severe impact on the overall industry’s recovery. The reason for the shrinking of the stablecoin market is due to regulators cracking down on stablecoins’ activities.
The recent regulatory crackdowns on stablecoin issuers such as Tether and USDC have not been good news for the crypto industry. USDC, which is the second-largest stablecoin, has been accused of not providing adequate information about its reserves, while Tether has been involved in legal disputes. Such developments have created fear and uncertainty among investors and have caused the stablecoin market to shrink.
The reduction of the stablecoin market means that the options for investors to keep their funds safe are getting limited. Stablecoins are used to preserve the value of funds during market downturns. When the market is volatile, stablecoin prices stay unchanged, offering investors a safe place to park their funds during a bear market. With shrinking options, investors will have to look for alternatives to keep their funds safe, which will contribute significantly to the crypto market’s instability.
Another reason why it will be difficult to foresee any significant crypto recovery is due to the lack of mainstream adoption. Despite all the hype and buzz surrounding cryptocurrencies, they are yet to be adopted on a significant scale by mainstream businesses and consumers. The lack of adoption limits the crypto market’s size, making it difficult for investors to see any significant recovery.
Although crypto enthusiasts may argue that acceptance levels are at an all-time high, the actual value of the crypto market is yet to reflect this. Despite the hype surrounding cryptocurrencies, it is still primarily a speculative market with limited mainstream adoption.
In conclusion, it is challenging to predict a stable crypto recovery in the near future. The impact of shrinking stablecoin options and the limited mainstream adoption of cryptocurrencies makes it harder for investors to find a safe haven, contributing to market instability. While cryptocurrencies have shown some stability in recent times, it is essential to delve deeper and look at the larger picture to understand why it will be hard to see any significant crypto recovery. As mainstream adoption increases, and the stablecoin market stabilizes, we may see a turnaround in the crypto market, but it may take some time.
Despite the recent recovery in cryptocurrency prices, J.P. Morgan analyst Nikolaos Panigirtzoglou is cautioning that the ongoing shrinkage of the stablecoin universe could hinder the sustainability of the rebound.
Stablecoins, which are digital tokens whose value is tied to a reserve asset and serve as a means of payment for various crypto transactions, are “the equivalent of cash in the crypto ecosystem.” As such, the recent decline in the market cap of stablecoins is a cause for concern, particularly as the stablecoin market share stood at less than $30 billion at the start of 2021 and just around $5 billion at the start of 2020.
Panigirtzoglou notes that the recent decline in the stablecoin universe is a result of several factors, including increased regulatory scrutiny of the industry, the unsettling of banking networks for the crypto ecosystem, and the reverberations from last year’s FTX collapse.
He further explains that the reserves of major stablecoins have increasingly consisted of Treasury securities, “implying a big challenge by stablecoins to maintain their pegs in an adverse scenario of a US technical default.” Such an issue could have a ripple effect across the entire crypto ecosystem, given the vital role stablecoins play in facilitating access to trading and decentralized finance.
Despite a YTD crypto recovery of over 50%, the crypto market cap of $1.14 trillion as of Friday afternoon is still down around 60% since the November 2021 peak and 11% from a year ago, according to CoinMarketCap data. Bitcoin, the world’s largest digital token by market cap, is still down over 60% from its November 2021 peak, while the largest altcoin, Ethereum, has dropped over 60% from its all-time high and roughly 10% year-over-year.
The expansion of the stablecoin universe can be thought of as a proxy for the amount of money that has entered the crypto ecosystem from fiat and vice versa. As such, the decline in stablecoin market share underscores the potential impact on cryptocurrency prices and the broader crypto ecosystem.
Panigirtzoglou’s cautionary note comes amid ongoing debates over the future of cryptocurrency regulation, particularly given the role of stablecoins in facilitating crypto transactions. The increasing scrutiny of the industry, along with the ongoing shrinkage of the stablecoin universe, highlights the need for continued vigilance and caution among investors.