This article discusses the growth and collateral evolution of stablecoins since 2019, outlining their types and market capitalisation, which reached $232 billion by March 2025. It examines how stablecoins react to both positive and negative Bitcoin price shocks, revealing that riskier stablecoins receive greater inflows during bullish market conditions. Overall, stablecoin demand is closely linked to crypto market activities, suggesting implications for future trading strategies.
Stablecoins are crypto assets pegged to fiat currencies, primarily the U.S. dollar. They have experienced exponential growth since 2019, evolving in collateral arrangements. This article updates on stablecoin market dynamics, detailing the evolution since 2022, especially during the May 2022 run on TerraUSD and the influence of Bitcoin price fluctuations on market behaviour.
Stablecoins are categorised based on their collateral backing, which includes:
1. Financial asset-backed stablecoins: Tether and USDCoin use traditional assets like U.S. Treasury securities.
2. Crypto-backed stablecoins: Backed by other cryptocurrencies such as Ether.
3. Algorithmic stablecoins: Maintain value through algorithmic supply adjustments instead of collateral.
As of March 2025, the stablecoin market cap reached $232 billion, indicating a significant rise from December 2019, with Tether and USDCoin making up 86% of the market.
The collateral composition of stablecoins has shifted since 2022. For instance, Tether transitioned from riskier assets, such as commercial paper, to safer U.S. Treasury securities. Other stablecoins like Binance-Peg and Pax Dollar have moved towards reverse repurchase agreements and cash. By December 2024, Tether maintained 18% of its reserves in higher-risk assets, highlighting the ongoing risk management strategies within the stablecoin sector.
Analysis of market reactions to Bitcoin price shocks reveals that inflows into stablecoins increase with positive Bitcoin price fluctuations. Specifically, riskier stablecoins, including crypto-backed and algorithmic types, saw larger inflow percentages compared to less risky U.S.-based asset-backed stablecoins. This pattern reflects a risk-on sentiment in the market and parallels previous findings regarding negative Bitcoin price shocks, where riskier tokens experienced a drop in demand.
The correlation between stablecoin demand and overall cryptocurrency activity suggests that during favourable market conditions, such as Bitcoin price surges, there exists a holistic effect benefiting the entire crypto ecosystem. Conversely, negative market patterns trigger safety-seeking behaviours. This interplay indicates a significant reliance of stablecoins on broader crypto-asset market dynamics, shaping future trading and leverage activities.
