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Stablecoin Market Faces Challenges: Declining Valuations and Loss of Confidence

stablecoin market faces challenges declining valuations and loss of confidence

Stablecoins primarily pegged to the US dollar but also available for other fiat currencies or assets like gold experienced exponential growth during the bullish years of 2020 and 2021 in the crypto market . However the crypto winter of 2022 triggered by the TerraUSD (UST) stablecoin debacle shattered the stability of stablecoins . Loss of confidence and various issues encountered in 2023 have contributed to the decline in the value of stablecoins . As a result the total capitalization of major stablecoins dropped from $139 billion at the beginning of the year to $127 .5 billion as of May 2023 .

Loss of Confidence and Recent Troubles Shake Stablecoin Market

The loss of confidence in stablecoins began with the TerraUSD (UST) stablecoin crisis in May 2022 . However more recent issues have further eroded trust in these digital assets . In mid-February 2023 the Binance crypto exchange faced difficulties with its stablecoin BUSD . Its issuer, Paxos received an order from US financial regulators to halt any new issuances . Although BUSD is still backed by a 1:1 ratio with the US dollar all BUSD tokens are set to be redeemed or withdrawn by February 2024 . Consequently the capitalization of BUSD plummeted from $16 billion to just $5 .3 billion .

stablecoin market faces challenges declining valuations and loss of confidence 2

Volatility and Fear: USDC’s Momentary Dollar Peg Loss Impacts Confidence

The second challenge arose in mid-March 2023 when Circle’s USDC stablecoin temporarily lost its dollar peg . A severe banking crisis in the United States involving the collapse of the Silicon Valley Bank and two other banks caused panic and uncertainty . While Circle was able to demonstrate the resilience of its USDC stablecoin shortly after the incident the fear among stablecoin holders persisted for nearly 72 hours . USDC’s capitalization dropped from $43 billion to $29 billion following the incident . Amidst these challenges Tether’s stablecoin USDT has emerged as the notable winner experiencing an increase in capitalization .

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