The market value of global stablecoin assets fell by 14 per cent to $162 billion at the end of May, from $188bn at the end of the first quarter this year, after the de-pegging of Terra USD (UST), the fourth-largest stablecoin, according to Fitch Ratings.
The market grew 15 per cent to $188bn in the three months to March 31, only to reverse those gains after the Terra USD event on May 11, the rating agency said.
“UST’s market capitalisation plummeted to $300 million at the end of May, from $16bn at the end of the first quarter,” said Monsur Hussain, head of research at Fitch Ratings.
“UST’s collapse was triggered by the failure of the algorithmic mechanism pegging its value to the US dollar. The prices of other algorithmic stablecoins also decreased, with Frax and DAI similarly falling by 47 per cent and 32 per cent, respectively, between the end of Q1 and end-May.”
Stablecoins are digital tokens pegged to other traditional assets, often the US dollar. Stablecoin reserves are generally managed to preserve capital value, provide liquidity and minimise exposure to market risks, Fitch Ratings said.
However, Terra’s value is derived by algorithmic processes and is linked to another paired token called Luna.
In the case of Terra, the backing entity’s cryptocurrency reserve was not sufficiently large to serve as a source of stability when its algorithmic peg mechanism came under speculative pressure, Fitch Ratings said in a note last month.
There was a massive sell-off in cryptocurrencies in May that wiped more than $200bn in value from the market in 24 hours, knocked by weakened sentiment after UST fell as low as 20 cents.
“UST’s de-pegging caused volatility in the rest of the market, with Tether’s market cap falling by 11 per cent between the end of Q1 and end-May,” said Chloe Andrieu, a senior analyst at Fitch Ratings.
“UST’s failure has led to calls for increased regulatory oversight.”
The market remains concentrated, with Tether and USDC accounting for about 63 per cent of total assets at the end of May, according to the agency.
The eight largest stablecoins had an aggregated market value of $154bn at the end of May and accounted for about 96 per cent of the total market, according to price-tracking website CoinMarketCap.
“The number of stablecoins had increased to 100, from 75 at the end of the first quarter. New stablecoins are entering the market, with aggressive offers and large capitalisations attracting retail and institutional investors,” Ms Andrieu said.
However, Fitch said stablecoin reserve portfolios were generally becoming more conservative.
About 76 per cent of USDC's reserve portfolio was held in short-duration US Treasuries at the end of May, with the remainder in cash, the rating agency said.