Breaking into the first Terra-ble and Unstable half of the Stablecoin market and considering the 3 predictions of the stablecoin balloon, USDC being dethroned, and the massive growth of algorithmic stablecoins for the rest of 2022.

Key Takeaway: 

• The first half of 2022 witnessed a plummet by 57.8% of Bitcoin. It was followed by a decline in the market cap of about 70% since ATH, which was recorded at approximately $900 billion.
• The collapse of Terra (LUNA) and its ecosystem severely affected other involved parties, affecting throughout the crypto industry.
• A large group of various investors invested in Three Arrows Capital (3AC), which, unfortunately, was dragged down with it. 
• Prediction 1: The stablecoin supply will continue to balloon in 2022 – leading to increased regulatory scrutiny of stablecoins.
• Prediction 2: USD Coin will become the next dominant, taking over Tether’s position in the cryptocurrency ranking. 
• Prediction 3: A massive growth of Algorithmic stablecoins in 2022, due to the increase in regulatory scrutiny of centralized stablecoins.

An Unstable Quarter of Stablecoins

The first half of 2022 has been one of the most negative periods for the crypto market in the last two years. Terra, one of the largest ecosystems in the crypto market collapsed, many native organizations in crypto fell into a “forced sell” situation, and trading activity and prices plummeted…

The first half of 2022 witnessed a plummet by 57.8% of Bitcoin. It was followed by a decline in the market cap of about 70% since ATH, which was recorded at approximately $900 billion. While the top 30 coins’ prices have dropped by a fair bit, spot trading volumes have remained relatively stable at around $100 billion daily.

On April 18, Terra USD took over Binance USD to become the third largest stablecoin by market cap. According to CoinGecko, the market cap of USTC, which was $17.5billion, exceeded BUSD’s market cap of $17.4billion, on April 18. The collapse of Terra (LUNA) and its ecosystem severely affected other involved parties. The event created selling pressures and had domino effects throughout the crypto industry. In a July speech at the Bank of England Conference, Federal Reserve Vice Chair Lael Brainard compared it to a classic bank run. The quick demise of LUNA shook individual investors as well as companies with business models that relied on this project to deliver on its promise.

Following that, a large group of various investors invested in Three Arrows Capital (3AC), which, unfortunately, was dragged down with it. 3AC had a lengthy list of counterparties or companies that had their money wrapped up in the firm’s ability to at least stay afloat. From managing a fund of $10 billion in assets, which making 3AC one of the most prominent crypto hedge funds in the world, the firm turned its table on their investors

In another development, while Tether (USDT) retained its top spot in stablecoins, its dominance was declining. Once dominating almost 90% of the market, Tether’s share has dropped considerably over the past few years, and especially declined by 20%, as reported by CoinGecko in Q2. This year’s downfall has helped the stablecoin market to command a larger share in addition to boosting Tether rivals’ circulation as well. As USDT shrunk, Circle’s USD Coin (USDC) gained prominence. USDC was a close second and took the lead in Q2 in terms of growth with close to a 7% increase.

In contrast, FRAX and DAI, however, witnessed considerable losses of 48% and 32% in market cap respectively. According to Sam Kazemian, founder of Frax Finance, the risky seeds were planted long before the collapse of UST and things started when the Federal Reserve raised interest rates by 0.25% in March. 

3 Predictions for the second half of the Cryptocurrency Market

Prediction 1: The stablecoin supply will continue to balloon in 2022 – leading to increased regulatory scrutiny of stablecoins.

During the first four months of 2022, the supply growth continued to grow, at a much slower pace with 50% annualized growth, compared to the previous 500%. The market continued moderately until it reached the supply peak of $187.4 billion on April 25th, which, then, was disturbed by the meltdown of the algorithmic stablecoin UST and marked an inflection point in mid-May. This led to a fall of $160 billion by May 15th, which was equivalent to a 14.6% supply reduction in only 3 weeks. 

After facing the sharpest stablecoin drawdown ever, the magnitude of stablecoin supply reduction decelerated. During the period, from May 16th to July 1st, the overall supply dropped 5.4%, or 35.8% annualized. Till the end of Q2 2022, the stablecoin supply sat at $151.3 billion, witnessing a drop of $35.1 billion, or 18.8% over the last period. This is the most terra-ble quarter in the history of stablecoins. 

Looking back at the first half of 2022, the three largest – Tether, USDC, and BUSD, all gained a slot in the top 10 list, even though there was a market loss of $13.7 billion at an annualized growth rate of -16.1%. Within the crypto ecosystem, is this a glimpse into the stablecoins future ranking?

However, excluding UST from the calculation, there was only a -2.6% supply reduction, which equaled to -5.2% annualized, and considerably less than the original -8.3%. It meant that UST was one of the main factors behind the observed fall in the circulating stablecoin supply. This also gives a verdict that the stablecoin balloon continued to inflate for a long time, before a rapid trend reversal.

Prediction 2: USD Coin will become the next dominant, taking over Tether’s position in the cryptocurrency ranking.

There are many metrics to compare USDT and USDC to acknowledge the twos’ development over time across use-cases and sizes. However, in this article, only metrics related to market cap and market dominance are included. Such metrics are the number of users, number of transactions, and average/median transaction amounts, among others. 

Similar to Bitcoin, Tether successfully capitalized and enjoyed an unparalleled early mover advantage, which contributed to its consistent reign as the king of the stablecoin. However, the king had run into some trouble as its market dominance fell below 50% for the first time in November last year. Since then, the king has not been able to recover yet, and the year 2022 has extended the pain further as USDT’s market cap has slipped from $78 billion to $66.3 billion.  

On the other hand, the USD Coin has blossomed in 2022, becoming Tether’s formidable rival, as being a more regulatory-compliant stablecoin. USDC’s market cap has increased from $42.2 billion to $55 billion, with an astonishing 70.4% in annualized growth. 

Getting back to the beginning of 2022, while Tether maintained its market dominance of 47.5%, USDC sat at 25.8%. Moving into the end of the first half now, USDC has gradually closed the gap, reaching closer to the king, as USDC’s market share was 36.3% compared to the 43.8% market share of Tether. 

As things happened in that way, when will USDC dethrone USDT by market cap? To answer this question, let’s examine this intersection point that can be expected by assuming a continuation of the current growth rates of 70.4% of USDC and -28.7% of USDT.

Based on these growth rates in the future, USDC would take over Tether’s position as the king of stablecoin with a market cap of $61.3 billion in mid-October 2022. However, due to the uncertainty of future events, any conclusion or interpretation of such a growth rate be made carefully. Nonetheless, it might remain an interesting data point to bear in mind. 

Prediction 3: A massive growth of Algorithmic stablecoins in 2022, due to the increase in regulatory scrutiny of centralized stablecoins.

During the first half of 2022, algo stables saw their market dominance fall from 8% to 2%. After the collapse of the most popular algorithmic stablecoin UST, algo stables had witnessed their market cap plummet, falling from $13.3 billion to $3.0 billion, equating to a 77.4% decline.

There are predictions about a ballooning stablecoin supply in 2022 that led to increasing regulatory scrutiny, which, in turn, would lead to the growth of algo stables. Although the supply growth is yet to unfold, let’s break into the third prediction in this article, the relationship between the increased regulatory scrutiny, stablecoins’ supply growth, and algorithmic stablecoins. 

Taking a long-term view, the massive supply growth, especially in the first four months of this year, had undoubtedly made regulations more aware of this part of the cryptocurrency system. However, the ballooning stablecoin supply did not serve as a regulatory catalyst. Instead, the collapse of the most popular algorithmic stablecoin UST sparkly increased the regulatory efforts to address stablecoin-related risks

In this situation, excessive regulatory requirements could put pressure on the centralized stablecoin issuers’ profitability so far down that operating profitability could be impossible This may create fertile ground for algorithmic stablecoins, which might rise back up as a regulatory pushback. 

In conclusion

We’ve just gone through the winter season of the cryptocurrency market, which also mainly affected the stability of stablecoins. However, there’re always lights at the end of the tunnel that might come with the algorithmic stablecoins or USDC investors. To stay tuned with the market and trends in the second half of the industry, subscribe to our weekly newsletter via hello@satom.vc