Stablecoins gaining popularity lately but face uncertainty over new regulations. Hong Kong announced it will not permit algorithmic stablecoins
Stablecoins have harnessed much attention from the emerging decentralized finance (DeFi) ecosystem. These coins facilitate trades on crypto exchanges that allow market participants to avoid inefficiencies emerging from converting back to fiat currency for crypto trades.
The Total market cap reached its highest level in mid of 2022 that started in October 2021. Since August 2022, there has been a constant decline in the market cap of stablecoins. However, with the current risk-off sentiment, investors show confidence in holding BTC and ETH on exchanges over stablecoins.
The above chart shows the 30-day change in the top 5 stablecoins buying power on exchanges. It works by taking into account the supply of the top five stablecoins, USDT. USDC, BUSD, DAI, and FRAX, then subtract the USD-denomination change in BTC and ETH exchange flows over the period.
As per Cryptoquant, the recent short-term increase in the circulating supply of stablecoins has led to an explosive rise in bitcoin prices. The trading volumes of stablecoins have soared in 2022, specifically during the last two months of the year. But, now the trend is reversing this could also mean selling in the crypto market might be possible.
On the other hand, data suggest there is a negative correlation between price and stablecoin volumes or deposits. Further, pre-fed anxiety in the market could be seen in the market and analysts expect high volatility. An analyst from CryptoQuant said not much dry powder coming into exchanges. A dry powder is a reduction or cooling of stablecoins deposits.
Stablecoins are designed to insulate the volatility risk of crashing other financial markets if they fail as they are backed by traditional assets.
