Stablecoins in the cryptocurrency market help provide USD-pegged tokens within a somewhat volatile sector. In bull markets, the market capitalization of stablecoins tends to decline as investors rush to buy more volatile assets in search of profit, but in bear markets, investors seek refuge in low-volatility stablecoins, thereby increasing its market capitalization.
On Jan. 26, the total market capitalization of stablecoins such as Tether (USDT), USD Coin (USDC), Binance USD (BUSD), and Dai (DAI) was over $131 billion.
Stablecoins are so crucial to the future of cryptocurrencies that Moody’s, a respected research agency, is planning to develop a scoring system. The scoring system could help reduce the speculation and fear that some investors have about stablecoins.
This fear, coupled with the lack of transparency of stablecoins, has caused one of the main stablecoins, BUSD, to have experienced a significant drop in use in recent weeks.
Let’s examine the factors that affect the BUSD stablecoin.
BUSD Market Cap Takes A Hit
While BUSD’s market cap saw a huge spike on Sept. 30, 2022, those gains were due to Binance’s decision to forcefully shift the exchange’s USDC holdings to its own stablecoin. Now those gains are gone. At the time, automatic conversions cost USDC about $3 billion in market capitalization.
BUSD’s market capitalization has continued to fall due to issues with dollar-pegged token management that first came to light in January 2023. Although Binance disputed reports that the stablecoin was not fully supported, Investor fears caused a huge exodus.
According to blockchain analytics provider Nansen, the circulating supply of BUSD decreased to $15.4 billion on Jan. 25. The drop represents a decrease of $1 billion in the previous week and $2 billion compared to December 2022.
The most recent decline accelerated BUSD’s market cap decline from $22 billion, as concerned investors rushed to pull money from Binance after it misrepresented the amount of digital assets in its collateral reserves by combining corporate holdings in the reports.
BUSD deposits struggle
Since the price of Bitcoin (BTC) has been on the rise, stablecoins have often seen declining deposits as investors sell them for other assets. One way to gauge demand for stablecoins is to look at deposits to exchanges.
According to CryptoQuant analyses:
“A higher value indicates that investors who deposited a lot at once are recently increasing. For stablecoin, the increase in value indicates buying pressure.”
This means that negative numbers show a decrease in buying pressure. While all stablecoins are seeing lower demand or deposits, BUSD has witnessed almost 3x more deposits.
The massive decline in demand may continue as markets continue to rise and doubts persist around BUSD.
Most of BUSD is on Binance
Stablecoins see a spike in demand when used in trading pairs with altcoins. The trading use case works on both centralized (CEX) and decentralized (DEX) exchanges.
A concerning statistic surrounding BUSD is the lack of stablecoin usage outside of its native exchange; Binance. While $13.8 billion worth of BUSD is on Binance, the next closest figure is $32.6 million BUSD on Crypto.com. While Crypto.com may be the second largest BUSD exchange, USDC is the largest stablecoin on the exchange at $582 million, dwarfing BUSD’s numbers.
The lack of use cases following the significant decline in demand for BUSD does not bode well for BUSD’s market cap if the trend holds for a long period of time. Combining these two negatives with exchange partner SWIFT’s recent move to ban dollar transfers of less than $100,000 on Binance suggests that the stablecoin could continue to face significant headwinds.
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