Recent research has shown that the issuance of stablecoins does not push the price of Bitcoin or other cryptocurrencies higher.
Stablecoins Do Not Increase Crypto Market Cap
A study, funded by the University of California Berkeley’s Haas Blockchain Initiative, shows that the issuance of stablecoins does not increase the prices of Bitcoin or other cryptocurrencies. As a result, they do not inflate the market cap of the crypto space.
According to the report issued on Friday, Richard Lyons and Ganesh Viswanath-Natraj, who are U.C. Berkley’s chief innovation and entrepreneurship officer and assistant professor of finance at Warwick Business School, respectively, found out that stablecoins serve as tools for investors to react to the market movement. Based on this, they do not use stablecoins to push the price of Bitcoin and other digital currencies.
The researchers’ analysis of trading data shows that investors use stablecoins as a store of value during periods of risk of price decrease in the cryptocurrency market. Lyons and Viswanath-Natraj further found strong evidence of another reason for flows from issuer treasuries to secondary markets, which is arbitrage trading. Traders turn to this investment vehicle when stablecoins deviate from their pegs.
Stablecoins versus Bitcoin and Other Cryptos
The debate about stablecoins affecting the prices of Bitcoin and other cryptocurrencies have caused a lot of controversy within the cryptocurrency space. A study carried out in 2018 by Amin Shams of the Ohio State University and John Griffins of the University of Texas, opined that the issuance of stablecoins (mostly Tether USDT) is timed after a market downfall, which results in the price of Bitcoin surging higher. The research also claimed that the issuance of the stablecoins was behind the bull run of 2017, which saw the BTC price reach its peak of nearly $20,000.
A few months after Griffins and Shams published their studies, the U.S. Department of Justice opened an investigation to determine whether Bitfinex and Tether had used the stablecoin to inflate the price of the leading cryptocurrency.
In late 2019, a class-action suit was filed against Bitfinex and Tether regarding their influence in the 2017 bull run of the cryptocurrency market. The claimants claimed that Bitfinex and Tether monopolized and conspired to gain a monopoly of the Bitcoin market, further accusing them of manipulating the market via the issuance of stablecoins. Bitfinex and Tether have been under fire from the general cryptocurrency market since then.
However, the research published by Lyons and Viswanath-Natraj contradicts what Griffins and Shams revealed two years ago. According to Lyons and Viswanath-Natraj, they found no systematic evidence that stablecoin issuance affects cryptocurrency prices. They added that their evidence supports alternative views including the fact that, “stablecoin issuance endogenously responds to deviations of the secondary market rate from the pegged rate, and stablecoins consistently perform a safe-haven role in the digital economy.”
At the moment, the market cap of the stablecoins in the crypto space is above $9 billion. The stablecoins occupy just a small fraction compared to the $205 billion total market cap of the cryptocurrency sector. During Bitcoin’s bull run of 2017, the total market cap of stablecoins was just around $1.25 billion.
It is left to be seen what the research of Lyons and Viswanath-Natraj will mean to the reputation of Bitfinex and Tether. However, it could convince regulators that stablecoin issuers are not manipulating the market when they push coins into the market. Instead, they are fulfilling the demand for the cryptocurrencies in the market.