Bitwise: Why Should Traditional Investors Pay Attention to Stablecoins?
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Bitwise: Why Should Traditional Investors Pay Attention to Stablecoins?
Stablecoins are targeting multiple industries each worth trillions of dollars.
Navigating Web3 tides with focused insightsAuthors: Juan Leon, Ari Bookman, Bitwise
Translation: Luffy, Foresight News
The Bitwise research team publishes its "Crypto Market Commentary" each quarter, analyzing the most important fundamentals and trends shaping the crypto market through data. This third-quarter commentary is particularly compelling.
On one hand, cryptocurrency prices have gone nowhere—markets have traded sideways for much of the past six months, just as they did in Q3.
On the other hand, as Bitwise Chief Investment Officer Matt Hougan put it, “Calm on the surface masks enormous progress underneath.”
We want to highlight just one aspect of that progress: stablecoins have emerged as the dominant application of blockchain technology.
Why Should Investors Care About Stablecoins?
Stablecoins are no longer niche. We’ve been talking about them for years. Now, major traditional companies like PayPal are launching their own stablecoins. Senior lawmakers in the U.S. House and Senate are debating stablecoin regulation. Last week, payments processing giant Stripe announced plans to acquire Bridge, a stablecoin issuance platform, for $1 billion—one of the largest crypto-related acquisitions ever.
So what makes stablecoins so valuable? And why should investors pay attention?
Unlike other crypto assets, stablecoins are designed to maintain a stable value relative to an underlying asset—usually the U.S. dollar. If you see a stablecoin fluctuating in price, something has gone wrong. That reduces their appeal as an investment vehicle, but enhances their utility as a medium of exchange. More importantly, this role positions stablecoins as a bridge between traditional finance and the crypto economy.
Beyond stability, they’re fast, efficient, and programmable. You can send $10,000 to anyone in the world in seconds—without worrying about bank hours or settlement delays. As digital assets, stablecoins can be programmed to execute smart contracts, enabling automated payments, escrow services, and a wide range of decentralized finance (DeFi) applications.
This is why stablecoin usage has surged to record levels. In the first half of this year alone, over $5.1 trillion in transactions were settled using stablecoins—rivaling Visa’s $6.5 trillion.
Stablecoin Transaction Volume, Source: Bitwise Asset Management, Coin Metrics. Data from Q1 2020 to Q3 2024. Note: "Other" includes BUSD, DAI, FDUSD, GUSD, HUSD, LUSD, PYUSD, TUSD, USDK, and USDP
What’s Driving Stablecoin Growth?
Why are traditional payment giants like PayPal launching stablecoins? The answer: the business model is simply too good to ignore.
Issuers collect U.S. dollars (or other fiat currencies) and issue an equivalent amount of stablecoins. They then invest those fiat reserves in U.S. Treasuries and other yield-bearing assets. The interest income goes straight to their bottom line.
How profitable is this model? Last year, Tether, the largest stablecoin issuer, earned more in profit than BlackRock.
These issuers are becoming major financial players. As shown below, the top five stablecoin issuers collectively hold more U.S. Treasuries than some G20 countries, including South Korea and Germany. Thus, stablecoin growth creates new demand for U.S. debt and adds liquidity to the Treasury market—benefiting the broader financial system.
Investors are eager to get involved. Circle, Tether’s biggest competitor, quietly filed for an IPO earlier this year. Meanwhile, public companies like Visa are actively planning to integrate stablecoins into their operations.
U.S. Treasury Holdings: Stablecoins vs. Major Foreign Holders, Data from U.S. Treasury and company filings. As of June 30, 2024
Where Are the Investment Opportunities?
So how can investors capture this opportunity?
Keep in mind: stablecoins don’t appreciate. They carry the same inflation pressure (and currency risk) as the assets they’re pegged to.
Instead, where should investors look for opportunities—and what risks should they watch for?
1) Publicly Traded Companies
Multinational corporations are integrating stablecoins into their operations to gain a competitive edge. These firms are reflected in crypto equity indices such as the Bitwise Crypto Innovators 30 Index. Given that stablecoins offer lower transaction costs and faster settlements than traditional intermediaries, we expect companies like Visa and PayPal will not be the last to adopt them—more banks and payment processors are likely to follow.
2) Potential Alternative to Money Market Accounts
For most stablecoin holders today, holding stablecoins is like keeping cash in a checking account—no interest earned. But what if issuers could pass on a portion of the yield they earn from treasury reserves as interest to users?
If this path opens up, stablecoins could become a compelling alternative to money market funds—a $6.3 trillion industry. For financial advisors managing client cash balances, stablecoins could become a useful portfolio tool. With stablecoin regulation a top topic in Congress, this development warrants close attention.
3) Value Accrual to Underlying Blockchains
Most stablecoin activity occurs on Ethereum. Growth in stablecoins directly fuels network activity and indirectly supports ETH’s price. The reverse is also true: if stablecoin adoption stalls, it could dampen on-chain activity.
Final Thoughts
How big could stablecoins get?
Consider this: total liquid deposits in the United States amount to roughly $18 trillion. Stablecoins currently represent just 1% of that. What might happen to their relative market share if interest-bearing stablecoins are approved—or if clearer regulatory frameworks emerge?
The signal for investors is clear: now is the time to pay attention to stablecoins.
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