Hard to see crypto recovery as stablecoin universe shrinks, analyst says

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It would be hard here to imagine a sustained recovery in crypto prices without the shrinking stablecoin universe coming to a halt, JP Morgan analyst Nikolaos Panigirtzoglou wrote in a recent note to clients.

Although the price of bitcoin (BTC-USD), the world’s largest digital token by market capitalization, has jumped over 61% since the start of the year, it is still down around 60% since the start of the year. peaked in November 2021 and 11% a year ago, amid heightened regulatory scrutiny of the industry and the fallout from a series of high-profile bankruptcies that triggered a $2,000,000 wipeout. Similarly, the largest altcoin, ethereum (ETH-USD), has jumped more than 50% since the start of the year and has fallen more than 60% from the all-time high of November 2021 and around 10 % year-on-year.

Panigirtzoglou argued that the YTD crypto recovery may not prove as sustainable as some have suggested as the stablecoin universe shrinks. He explained that stablecoins, whose value is tied to a reserve asset, are the equivalent of cash in the crypto ecosystem, essentially serving as a means of payment for various crypto transactions. For example, traders use stablecoins such as tether (USDT-USD) and USD Coin (USDC-USD) to trade between various cryptos without having to use fiat currencies like the US dollar.

Headwinds from the U.S. regulatory crackdown on crypto, the disruption of banking networks for the crypto ecosystem, and the fallout from last year’s FTX meltdown are weighing on the still-shrinking stablecoin universe, did he declare.

The market capitalization of the largest stablecoins, Panigirtzoglou noted, has shrunk by almost $60 billion since hitting $186 billion in May 2022, before the multi-billion dollar collapse of the Terra ecosystem. (LUNA-USD) (UST-USD). As such, the Crisis accounted for just over a third of Terra’s downfall.

Still, the market share of stablecoins stood at less than $30 billion at the start of 2021 and around $5 billion at the start of 2020, underscoring how quickly these tokens have grown in popularity. Similarly, the crypto market capitalization of $1.14T on Friday afternoon compared to the peak of around $3T in Nov 2021, $833.3B in early 2021 and $193B in early 2020 , according to data from CoinMarketCap.

The expansion of the stablecoin universe can be seen as a proxy for how much money has entered the crypto ecosystem from fiat and vice versa, the note says. In other words, cryptos and stablecoins are interdependent.

More trouble to come in the wake of the US debt ceiling impasse? The analyst explained how the reserves of major stablecoins increasingly consisted of Treasury securities, “implying a big challenge for stablecoins to maintain their pegs in an adverse scenario of a US technical default.”

Such an issue in this adverse scenario “could ripple through the entire crypto ecosystem given the vital role stablecoins play in the crypto ecosystem by facilitating access to commerce and decentralized finance and as a as a source of guarantee”, he argued.

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