Three Things from 2021: Part 1, The Massive Growth of Stablecoins

Now is the time to re-engineer consumer financial services, one piece at a time.

The infrastructure on which the global financial system runs is changing. Such step or phase changes happen from time to time across industries. Many can remember, for example, what the internet did to journalism, shopping, and entertainment. Now a set of innovations—including the internet, smartphones, exchange-traded funds, robo-advisors, blockchain and smart contracts—could lead to a major evolution in the way that financial services are provided. If executed successfully, this evolution will (ideally) provide more choice, transparency and inclusivity to people who use financial services.

At our WisdomTree global offsite, I presented on three developments in the crypto industry I thought were interesting and relevant for WisdomTree’s business. If not under-the-radar, I think these were at least underappreciated. I’ve written a short blog on each – part 1 below on stablecoins.

OK, stablecoins are definitely not under-the-radar, especially with policy makers and regulators in Washington D.C. speaking about stablecoins with increasing frequency; however, I still think the growth in these assets has been underappreciated, especially in traditional finance circles.

Stablecoins are crypto tokens that are pegged to some external value. The vast majority of stablecoin assets are tied to the U.S. dollar and maintain this peg through 1:1 redeemability for U.S. dollars (sometimes called ‘crypto dollars’).

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In January 2020, there was a total of $6 billion in stablecoin assets. One year later, that number was $30 billion. One year after that, $165 billion. This growth is outpacing the growth of the overall crypto market, with stablecoin assets growing from 3% of total crypto market cap in January 2020 to 7% in January 2022.

Why has this asset and technology had such explosive growth? One answer is the growth of decentralized finance, or DeFi, although, interestingly, stablecoin assets have continued to grow as metrics of DeFi activity have flattened since December 2021. For the most part, stablecoins appear to be a phenomenon specific to crypto markets, with all the intricacies entailed in the global trading of these assets. One can start to see the early innings of this changing with applications across retail payments, wholesale payments, remittances and value storage continuing to grow for users across different circumstances.

Given that commodities (and now bitcoins and other crypto assets) are typically priced in USD, it’s not a surprise that stablecoins started with U.S. dollars. I don’t expect it to stop with U.S. dollars. Gold, of course, has had an important role in human history serving as a form of money. I see gold, like bitcoin, serving many individuals’ desires for alternative stores of value, especially amidst recent elevated inflation. I expect tokens backed by assets or other fiat currencies to contribute to the next wave of growth in stablecoins.

¹Source: The Block and Coin Metrics.