While anything growing exponentially these days, can be characterized as Bubbly and could actually be Wobbly, the question to ask yourself is whether you are compensated for the risks you are taking. This is no new insight or something that applies to one class of investable assets and not to another.
Today I won’t talk about public stocks or private market valuations or cryptocurrencies. I want to focus on stablecoins and more so on the currently dominant share which is stablecoins backed by the US dollar. The reason is that USD backed stablecoins have been growing at an exponential rate (not Wobbly at all) and there are several companies that offer extremely high-interest rates for your USD backed stablecoin deposits, to the point that you may claim they are Bubbly.
Growth of Stablecoins
Source: https://stablecoinindex.com/marketcap
There is an undeniable fact in the cryptocurrency market. Bitcoin used to be the reserve currency in the cryptocurrency market, which meant that when crypto traders took profits, they would hold Bitcoins and not fiat. Bitcoin has lost this reserve currency status to Stablecoins. I won’t say forever but I can confidently say that will not change in 2021.
Source https://coincodex.com/cryptocurrencies/sector/stablecoins/ 7/2/2021
There are four stablecoins with a market capitalization of over $1billion and the three of them are USD pegged. The demand for such stablecoins is largely institutional rather than retail. The reason is that stablecoins are the way to borrow Bitcoin and profit from the arbitrage no-brainer trade between Spot markets and Derivatives. As the Ethereum derivatives market also grows, there will be demand for that arb trade too.
Genesis claimed that the Bitcoin arbitrage trade offered a 15% annualized return which is huge. I would not characterize it as Wobbly, even though it may disappear and of course, it will eventually but for now it has enough juice in it.
We can safely say, that as long as there is a demand to borrow Digital Dollars and engage in this kind of crypto arbitrage, we will continue to see growth in stablecoins. I am not saying that this is the only factor of stablecoin growth. However, it is the main factor behind the High-Yield deposit rates that several companies are offering if you deposit your stablecoins.
Savings rates on USD pegged Stablecoins
Data 21/1/2021
Data 7/2/2021
Source: https://bitcompare.net/
In addition to the arbitrage explanation, for these high yielding deposits, we also see a significant difference between Tether (USDT) rates and USDC. The continuous large demand for Tether (despite the multiple regulatory risks [1] around its questionable practices of issuing large amounts of Tether without audited reserves of 100%) points to an additional hidden factor that can explain these high yields (high and unsaturated demand). The word on the street has been that Tether is the way crypto natives obtain huge leverage on their crypto portfolios on unregulated exchanges (like Binance or ByBit).
Think of the spread between the 15% annual return from the arbitrage trade and the 6%-8% you can earn on USD backed Stablecoins. There is enough margin for the otherwise classic business model deployed by deposit-taking institutions that make loans at a spread.
These high-interest paying deposits are also no different than the usual higher deposit rates from neo banks that want to attract customers. Only neo banks can’t sustain these high rates for long. Their marketing budget can’t last for that long. In the Crypto world, the companies that are well funded by VCs can count these high deposit rates as CAC.
Funding of Companies that offer high-interest rates
From the investor`s point of view, the high interest reflects the main counterparty risks.
These are not FDIC insured deposit-taking institutions. The risk management of their lending activities is important (due diligence and collateral requirements). If the stablecoins…
Read More:DeFi high USD Deposit rates on Stablecoins – Web Hosting | Cloud Computing |
