Could Stablecoins Put an End to Money Market Accounts?

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By Juan Leon, Senior Investment Strategist & Ari Bookman, Senior Editor

During a quiet quarter for crypto prices, stablecoins took aim at multiple trillion-dollar industries.

Every quarter the Bitwise Research team publishes the Crypto Market Review, a data-driven look at the most important fundamentals and trends that are shaping the crypto markets.

The Q3 edition is a doozy.

On one hand, to put it bluntly, crypto prices went nowhere. The market chopped sideways as it has been doing for much of the last six months.

But on the other hand, as CIO Matt Hougan put it in his executive summary, “The quiet on the surface masked a huge amount of progress underneath.”

We want to zoom in on just one aspect of that progress: the crowning of stablecoins as a dominant application of crypto technology.

We always say that crypto is on the brink of finding its killer use case. Well, here it is.

Why Should Investors Care About Stablecoins? 

Stablecoins are not exactly a secret anymore. We’ve been talking about them for years (see here, here, here, and here). Major corporations like PayPal are launching their own stablecoins. They’re being discussed at the top levels of the U.S. House and Senate. And just this week payment-processing giant Stripe announced its largest acquisition ever: a $1.1 billion deal for Bridge, a stablecoin issuance platform.

So, what makes them so valuable? And why should investors care?

Stablecoins, of course, are unlike other crypto assets in that they are designed to maintain a stable value relative to some asset, usually the U.S. dollar. If you see a stablecoin’s price swing, something has gone terribly wrong. This makes them less compelling as investments, but much more practical as a medium of exchange. And more importantly, this role allows stablecoins to serve as a bridge between traditional finance and the digital economy.

Not only that, but they’re fast, efficient, and programmable. You can send $10,000 to anyone in the world in seconds, without worrying about banking hours or lengthy settlement times. And as digital assets, stablecoins can be programmed to execute smart contracts, enabling automated payments, escrow services, and a wide range of decentralized financial (DeFi) applications.

That’s why stablecoin use has rocketed to record levels. In the first half of the year, more than $5.1 trillion of global transactions ran on stablecoin rails. That’s not far behind Visa’s $6.5 trillion. This is no niche market. 

Stablecoin Transactions

How Stablecoins Are Taking Off

Why did PayPal, a traditional payments behemoth, launch a stablecoin? The business model is just too good.

It’s pretty simple: The issuer takes in U.S. dollars (or another fiat currency) and in return issues an equivalent number of stablecoins. They then use that fiat currency to buy U.S. Treasuries and other yield-bearing assets. And they pocket the interest.

How well does that model work? The top stablecoin issuer, Tether, made more profit last year than BlackRock.

These issuers are becoming big-time players. As the chart below shows, the top five stablecoins collectively held more U.S. Treasuries than some G20 nations like South Korea and Germany. As a result, the growth of stablecoins provides a new source of demand for U.S. debt and aids in liquidity provisioning for the U.S. Treasury market, making stablecoins a net positive for the broader financial system.

Investors are chomping at the bit to get in on this action. Tether’s largest competitor, Circle, is happy to oblige them; it quietly filed for an IPO this year. But while that’s in the works, public companies like Visa are already integrating stablecoins into their operations.

Holders of U.S. Treasuries: Stablecoins vs. Top Foreign Holders

What Does It Mean for Investors? 

So how can investors take advantage of the moment?

Remember: Stablecoins by design don’t appreciate in value. If anything, they’re subject to the same inflationary pressure (and currency exchange risk) as the assets to which they’re pegged. 

What opportunities, then, should investors look for? And what risks do they need to keep in mind? 

1) Public Companies

Some global corporations are integrating stablecoins into their operations to gain a competitive edge. These companies are reflected in crypto equity indexes, like the Bitwise Crypto Innovators 30 Index. With stablecoins offering lower transaction costs and faster settlement times than traditional intermediaries, we expect that firms like Visa and PayPal won’t be the last companies to take advantage of stablecoins. Expect to see more banks and payment processors entering the space. 

2) Potential Alternative to Money Market Accounts

For most stablecoin holders today, their holdings act similarly to cash in a checking account: They’re static. But what if issuers could pass on some of the profit they make from their Treasury reserves as interest? 

If that pathway were to open up, stablecoins would become an attractive alternative to money market funds—a $6.3 trillion industry. For advisors whose clients keep cash on hand, stablecoins could become a useful tool in a portfolio. With stablecoin regulation a hot topic in the U.S. Congress, this is something to watch.

3) Value Accruing to Underlying Blockchains

Most stablecoin activity happens on Ethereum. The growth of stablecoins directly contributes to the growth and stability of the network—and indirectly to the price of ETH. Of course, it also works the other way around: If the stablecoin model were to fail, it could weigh on network activity.

Final Thoughts

How big could stablecoins get?

Consider this: Liquid deposits in the U.S. amount to approximately $18 trillion. Stablecoins today are just 1% of the size of that market. What happens to that relative market share if we see the large-scale approval of interest-bearing stablecoins or a clearer regulatory framework?

For investors, the message is clear: The time to pay attention to stablecoins is now.

Risks and Important Information

No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.

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The opinions expressed represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events, or a guarantee of future results, and are subject to further discussion, completion and amendment. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.