A report into crypto’s capital flight
- The balance of stablecoins on exchanges is at a 2-year low
- In the last 5 months, over half the stablecoin balance on exchanges has flowed out, equivalent to $22.8 billion
- Treasury yields above 5% have given viable alternatives for investors, with capital fleeing stablecoins
- BUSD shutting down and USD Coin getting caught up with the SVB collapse has also pushed money out
- Tether has its highest market share in two years, despite 30% of its supply on exchanges heading for the exit door since FTX collapsed six months ago
A couple of months ago, I put together a deep dive analysing the flood of stablecoins leaving exchanges.
As of today, the exodus shows no sign of slowing down. Over half the total supply of stablecoins on exchanges has now fled in five months, equivalent to $22.8 billion.
As the above chart shows, the outflows kicked off in Q4 of last year, following the collapse of FTX, a time period during which Binance also came under heavy fire for how opaque its operation was.
Some outflows are easily explained. In February, BinanceUSD issuer SEC was sued by the SEC for violations of securities law, the development meaning the Binance-branded stablecoin would be no more, its market cap set to gradually decline to zero.
USD Coin, the US-domiciled stablecoin issued by Circle, has also had its issues. Firstly, being based in the US, there has been concern that regulators will come knocking for the same reason that Paxos came fire. More dramatically, however, was the collapse of Silicon Valley Bank, as 8.25% of the reserves backing USD Coin were held in the fallen bank.
While the SVB debacle ended with the US administration guaranteeing deposits, it did briefly drive the USDC peg down to 92 cents, amplifying the outflows of an already-slipping USDC market cap.
In fact, when comparing to before the FTX collapse in November, all the major stablecoins have seen significant outflows from exchanges:
Tether market share growing
Even Tether has seen large outflows, its balance falling 30%. This is despite the world’s biggest stablecoin growing even more dominant in terms of market share, now with its greatest share in over two years, as analysed in a previous data piece.
My deep dive two weeks ago assessed the implications for crypto as a whole of the growing dominance of Tether, but while its market share may be growing, its balance on exchanges is still falling – in line with the rest of the stablecoin space.
In truth, it goes beyond stablecoins. Elsewhere in crypto, liquidity is also thinning. The Bitcoin supply on exchanges is at its lowest since the prior bull market peak in 2017. Ethereum is the same – the balance of ETH at a 5-year low.
This makes sense when one takes a step back and reviews what has happened in the crypto space. Even beyond the issues specific to stablecoins that were mentioned earlier, the industry has been absolutely ravaged.
Multiple scandals have rocked the space – LUNA, Celsius and FTX, to name a few. Regulators are moving quickly against some of the industry’s biggest players. And most pernicious of all is the wider macro environment: last year saw the Nasdaq shed a third of its value, its worst return since 2008. This amounted to the first significant and prolonged pullback in wider markets in the history of crypto’s short existence, as Bitcoin was only launched in 2009.
A view of what has happened to Treasury yields should provide a clear picture of what has happened to liquidity. At the end of the day, interest rate hikes serve the purpose of slowing down the economy and pulling liquidity out of the system, helping to rein inflation in.
With rates rocketing from 0% to north of 5% on Treasurys, is it any wonder liquidity is pouring out of a space that has been rocked with scandal to the same extent that crypto has?
“Liquidity has evaporated from the cryptocurrency space at large”, said Max Coupland, director of CoinJournal. “Treasury yields are above 5%, while institutions have pulled investment following the scandals of FTX and LUNA. Despite the popular narrative that crypto is establishing itself as a mainstream asset class, the data suggests that money is moving in the exact opposite direction. This is true even if prices have risen in recent times, helped by the thin liquidity in markets”.
Thin liquidity means higher volatility
The flip side of this is that thinner liquidity means it takes less to move the price, with moves to both the upside and downside accentuated. This is a contributing factor to the run-up thus far this year.
As the market has moved to softer forecasts regarding the future path of interest rates, we have seen prices start to come up again. In crypto, this has been aggressive, with Bitcoin up 68% thus far this year and most other coins printing similarly lofty gains.
This dwindling supply of both Bitcoin and stablecoins on exchanges means volatility is naturally higher. And while the market is currently riding a wave of optimism that rate hikes are coming to an end (even if it is only because of banking wobbles proving the whole system is on the brink), this upward momentum could easily flip the other way around.
And with less liquidity, there is less to stop a runaway train – regardless of which direction it is heading.
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