Over the past few weeks, stocks markets, crypto markets, everything took a brutal beating amidst the fear of coronavirus pushing the market into recession. Investors have been selling everything they can get their hands on, even safe haven assets like gold and bonds got sold off in a rush to the safety of cash.
It's not so much that crypto and stocks are correlated.
It's that in times of deflation + liquidity crisis, the entire world, including stocks, bonds, real estate, commodities, currencies, and crypto, converges to one trade.
And that's the Dollar trade.
— Qiao Wang (@QWQiao) March 20, 2020
From bankers, companies to individual investors, everyone has been dashing to stock up on cash to ride out the chaos. This flight to cash is causing havoc in a market that hasn’t been seen since the financial crisis over a decade ago.
The key concern now is liquidity, the ready availability of cash and other easily traded financial instruments for which the central banks have been pumping trillions of dollars in the market.
The lack of liquidity also saw non-US borrowers paying a premium to access dollars. The forex markets have been extremely volatile this week as small currencies depreciated dramatically against the US dollar as the investors seek a safe haven.
The three-month euro-dollar and dollar-yen swap spread rose to their widest levels since 2017 only to drop after central banks pumped in cash.
Central banks all over the world have also lowered their interest rates and introduced stimulus packages to dampen the negative effects of the coronavirus crisis.
Cryptos’ “Flight to Safety”
The same way there is a flight to the US Dollar amidst the global instability, in the crypto market, money is pouring into stablecoins.
While during the past few weeks, bitcoin and altcoins got hammered, the market cap of most of the stablecoins increased, reinforcing that investors are piling into crypto cash equivalents.
While the total cryptocurrency market capitalization has lost 45% month to date the stablecoins capitalization keep growing. In the chart below some of the most popular USD backed stablecoins and their respective market capitalization change month to date. pic.twitter.com/seSl1TR3eq
— ICO Analytics (@ICO_Analytics) March 18, 2020
From March 10th through March 15th, Ethereum-issued Tether (USDT_ETH) market cap increased by about $300M. Coinbase and Circle’s joint effort, USD Coin (USDC) also had a huge gain, growing close to $150M in market cap since March 10th, reported Coin Metrics.
Recently, Circle CEO Jeremy Allaire tweeted about USDC’s market capitalization reaching ATH, “Fascinating to see “flight to safety” within the crypto macro market, but also demand for high quality USD liquidity for markets.”
In his series of tweets, Allaire shared his excitement, “It's still rewarding to see that this entirely new, entirely digital, blockchain based monetary infrastructure is working.”
“Demand for internet dollars — digital, fast, global, secure, cheap to use — should increase significantly. People and businesses will want an architecture where they can make and receive payments with less counter-party risk and more security,” added Allaire.
Fiat is Winning
Stabelcoins provide ease of access to investors and traders along with enhanced liquidity. This led popular stablecoin Tether (USDT) to surpass the market capitalization of $5 billion “amid a surge in interest in crypto’s most liquid, stable and trusted currency,” and take over XRP’s second position, as per Messari.
Binance’s stablecoin also jumped into the race, the US-dollar pegged Binance USD (BUSD), which surpassed $100 million in mark cap in just six months. Ethereum-based BUSD trades almost exclusively on the Binance exchange and is backed by US dollars in an FDIC-insured US bank and audited on a monthly basis.
Cash is king and as evident from the increase in the stablecoins' market cap, even in the crypto space, fiat is winning.