Understanding how stablecoins have fared in the crypto bear market
Long considered a hedge against inflation and a better alternative to fiat currencies that are susceptible to devaluation, most cryptocurrencies have significantly underperformed benchmark stock market indices.
The reason: Liquidity pressures brought on by the tightening of monetary policy by central banks led by the United States Federal Reserve (Fed) and including the Reserve Bank of India (RBI).
Fiat currencies are money issued by central banks that’s not backed by a commodity like gold.
Aimed at arresting record inflation in the world’s largest economy, the quantitative tightening has caused both stock and cryptocurrency prices to correct significantly from their peaks in a phenomenon eerily reminiscent of the bear market cycle in 2017.
While stablecoins like Tether (USDT) and USD Coin (USDC) have recovered smartly after being getting de-pegged from the US dollar, the Terra (UST) crash has quashed the belief that stablecoins are stable after having wiped off billions of dollars of investor capital.
Created as a better alternative to other volatile cryptos like Bitcoin or Ether, stablecoins have their values tied to other fiat or crypto currencies, commodities or even financial instruments and offer a far less volatile option for transacting in the blockchain ecosystem.
Although USDT and USDC contribute nearly 80 percent of the stablecoin market, the panic caused by the UST crash resulted in USDT losing over $10 billion in market cap. USDC benefitted massively with its market share rising from 27 percent to 34 percent in the aftermath.
Issued on a 1:1 basis with collateralised US dollar funding, these tokens have now stabilised at near the $1 mark as their issuers took steps to secure additional collateral to compensate for
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