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How stablecoins affect the currency market : Analysis 2021

Stablecoins are increasingly establishing themselves in the crypto market and beyond. In terms of trading volume, Bitcoin has long ceased to be the No. 1 cryptocurrency, but Tether USDT. But how much do stablecoins influence the foreign exchange market and can they pose a threat to the monetary policy of the central banks? The Friday Comment.

Since stablecoins in most cases only represent a fiat currency or a commodity one-to-one or at least attempt to do so, they do not serve as an object of speculation themselves but are only a means to an end. They bring stability to the otherwise volatile crypto financial market. For decentralized financial applications of all kinds, they are essential to enable applications outside of speculation. Conversely, the question arises as to what influence stablecoins can have on their base value.

Anyone who purchases a classically covered stablecoin such as Tether (USDT) also generates demand for US dollars. After all, at least according to the promise, every USDT should be covered by one US dollar equivalent. In addition to bank deposits, these can also be government bonds. The demand for a stablecoin, when physically deposited, also has a feedback effect on the respective underlying.

US dollars for the world

So far, the US dollar has been the undisputed reserve currency. The euro, as the No. 2 reserve currency in the world, has no chance against the so-called greenback. In the crypto market, this lead is even greater. The largest stablecoins in terms of market capitalization and trading volume are all based on the US dollar: Of the ten largest stablecoins in terms of market capitalization, nine are US dollar stablecoins. If you look at trading volume, it’s still eight out of ten.

So if there is one stablecoin that can influence its base fiat currency, it is the US dollar stablecoins. However, the US dollar is also the largest currency in the world. In relation to this, the market capitalization and the trading volume of the stablecoin must be correspondingly high in order to actually be able to exert an influence.

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