Stable Coins Benefit As Bitcoin Falls Below $40,000

In the past 24 hours, bitcoin has fallen over 6%, now sitting below $40,000, the first time since September 2021. From a technical analysis perspective, bitcoin has been correcting since November 2021.

Despite the softening prices, not all market segments are losers, e.g. stable coins. Recently, stable coins have become much maligned by regulators given their growing demand. But, investors appear to be rotating out of risk assets into stable coins at an expedited pace. According to CoinGecko, total stable coin market cap is $170 billion with $81 billion in daily trading volume.

Certain stable coins are experiencing greater capital inflows than others, which requires a deeper dive.

Stable coins that offer additional utility, i.e. reliable yield, beyond being a medium of exchange have seen even higher capital inflows. The first example, TerraUSD (UST), the native stable coin of the Terra blockchain.

Over the past 90 days, UST market cap has grown from $2.7 billion to $11 billion. As mentioned in a prior post, UST provides users the ability to deposit into Anchor Protocol for 19.52% APY, at the time of writing.

The second example, Magic Internet Money (MIM), the native stable coin of the Abracadabra Money ecosystem has experienced similar growth over the last 90 day period.

MIM market cap has grown from $1.9 billion to $4.6 billion. Again, as previously mentioned, the likely catalyst is MIM’s ability to unlock liquidity of yield-bearing assets and generate even more yield via its DegenBox strategy.

The last example, Frax Finance (FRAX), the fractional reserve stable coin of the Frax Finance ecosystem. FRAX’s market cap has increased from $500 million to $2.6 billion over the past 90 days.

FRAX is an interesting study given growth is tied to two mechanisms — the collateral ratio (CR) and algorithmic market operations (AMO). FRAX is a fractional reserve stable coin, meaning some percentage of reserves backing the dollar peg is nothing.

Currently, FRAX’s CR is 84.25%, down from 100% in January 2021; meaning 15.75% of reserves are not backed by collateral assets. This allows FRAX supply to grow at a faster pace.

Similar to MIM and UST, AMOs improve capital efficiency by allowing yield generating opportunities for FRAX holders. For example, Lending strategies allow users to mint FRAX and lend on other protocols, generating yield. Also, the Collateral Investor AMO moves idle USDC collateral to DeFi protocols that provide yield.

If the market environment continues to soften, investor rotation into yield-bearing stable coins is likely to continue. Tracking these flows paints of picture of a sophisticated investor base constantly looking to minimize volatility and maximize yield in the current environment.