ASSET-BACKED ASSETSSTABILITY ASSESSMENT

What is an asset-backed coin?

These are coins backed by a tangible asset or its value. An obvious example is USDT, a coin pegged to the value of the US dollar. Such assets are traditionally referred to as stablecoins. However, coins can be pegged to any traded asset, such as gold or stocks. 

This is the second part of our article, the first part is dedicated to: 

• Stablecoin Market Overview;
• Analyzing the situation on the Stablecoin market;

Read the first part using this link. 

Stablecoin market analysis

Stablecoins, especially those pegged to the US dollar, moderately correlate with Bitcoin. In a volatile cryptocurrency market, the value of USD-stablecoins may depend on the dynamics of Bitcoin. This is especially true for new and minor projects. This correlation is insignificant for large projects, indicating their resistance to cryptocurrency market fluctuations.

Stablecoins pegged to other currencies are less affected by the change in Bitcoin price. This makes them more stable and attractive to users seeking an alternative to USD-stablecoins.

Coins pegged to cryptocurrencies such as Ethereum and Bitcoin are subject to high risks due to the volatility of the underlying assets. Maintaining their value requires significant reserves and active management, which can be a barrier to entry for conservative investors.

Many national banks are wary of cryptocurrencies. Control over the issuance of national currencies is in the sphere of interest of states and supranational financial institutions. In this regard, we expect the emergence of national stablecoin projects issued by state institutions. This can lead to market growth due to significant market participants' investments in new assets or decreased capitalization of existing coins.

PRICE DYNAMICS ANALYSIS FOR DIFFERENT ASSETS

USD-stablecoins

Stablecoins pegged to the dollar are the dominant asset group. When assessing the average value of such coins, considering the spread, there are notable signals of a correlation between the Bitcoin exchange rate and stablecoin value. 

The correlation coefficient between the average price of USD-stablecoins and the price of Bitcoin is estimated as moderately positive and amounts to 0.7. The dominant part of coins among the 181 projects show signs of correlation with external volatility factors. Theoretically, such coins risk difficulty securing a US dollar peg in a bear market scenario. 

However, no such correlation exists for the largest USD-stablecoin issuing projects (the coefficient is 0.1). 

Other currencies

The averages of non-USD-related stablecoins show a lower correlation with the Bitcoin exchange rate. Such coins are most often characterized by positive deviations from the exchange rate (similar to USDT and USDC). 

Europe

Asia and Africa

Americas

Sustainability assessment

Coins with low capitalization and trading volumes are characterized by the influence of the Bitcoin exchange rate on their value and value spread. 

The chart below assesses the degree of correlation between the Bitcoin exchange rate, the coin value spread, and the coin price. 

The presence of moderate or high correlation (positive or negative, from 0.5) allows us to conclude that the coin's dynamics are connected to the rate of the cryptocurrency market.

Cryptocurrency Assets

Cryptocurrencies such as Bitcoin or Ethereum are subject to sudden and unpredictable price fluctuations, making it challenging to maintain a stable peg. This requires significant reserves and active management to stabilize the value of such coins. In addition, the need for a regulated and stable legal status for many cryptocurrencies creates additional risks that may discourage investors and users from utilizing such assets.

In general, the pegging of ETH coins is less stable than that of BTC coins. The correlation of coin rates with BTC as the pegged asset is 0.9 (high positive correlation). For Ethereum, it is 0.5 (weak correlation). This means that price fluctuations of ETH coins are more unpredictable and less dependent on the value of Ethereum compared to BTC coins. This makes it more difficult to maintain exchange rate stability and may require more complex management mechanisms and more reserves to compensate for price spikes.

For coins with Polygon, Dogecoin, Cardano, Arbitrum, or Litecoin as pegged assets, the correlation is 0.99 (relative to the pegged currencies). The average deviation from the exchange rate does not exceed 2%.

Evaluating the metal stablecoins stability

Coins pegged to metals can vary widely, with anchor assets ranging from a troy ounce to a kilogram of metal. This causes significant differences in value between them. Our market research has taken these variations into account.

Sustainability assessment

The analysis of metal coins indicates a relationship between the Bitcoin rate and the spread or the coins' value. This relationship is weak for the most significant assets (Tether Gold and PAX Gold).

Conclusion

Stablecoins, especially those pegged to the US dollar, show a moderate correlation with Bitcoin, indicating the impact of market volatility on their value. However, large projects remain resilient to these fluctuations, making them more reliable for investors.

Bitcoin's exchange rate less affects stablecoins pegged to other currencies, offering an attractive alternative. Coins pegged to cryptocurrencies like Ethereum and Bitcoin face high risks due to asset volatility, requiring significant reserves and active management. National stablecoin projects issued by governments could significantly impact the market, attracting substantial investments but reducing the capitalization of existing coins.