Ongoing concerns about the solvency of the Binance exchange, increased regulation of the crypto industry, and questionable use cases are eroding the market capitalization of BUSD. Crypto expert Kyle White examines the background for his altcoin project.
BUSD has seen a massive usage drop in recent weeks
Stablecoins in the cryptocurrency market help provide US dollar pegged tokens in the volatile industry. In bull markets, stablecoins’ market capitalization tends to decrease as investors flock to more volatile assets. Also, in bear markets, investors take refuge in stablecoins with low volatility, thereby increasing their market value. On January 26, stablecoins such as Tether (USDT), USD Coin (USDC), Binance USD (BUSD) and Dai (DAI) have a combined market cap of over $131 billion.
Stablecoin supply dominance / Source: GlassnodeAs you follow on Kriptokoin.com, stablecoins are so important to the future of crypto that reputable analytics agency Moody’s plans to develop a scoring system that could help curb some investors’ speculation and fears about stablecoins. This fear over the lack of stablecoin transparency has led to one of the top stablecoins, BUSD, seeing a massive usage drop in recent weeks. Let’s examine the factors that affect BUSD.
Altcoin market cap has taken a big hit
While the BUSD market cap saw a massive increase on September 30, 2022, these gains came from the Binance exchange’s decision to forcibly swap USDC holders for its own stablecoin. However, those gains have since evaporated. At that time, automatic conversions reduced USDC’s market value by $3 billion. The market cap of BUSD continued to decline due to issues with the management of dollar-pegged tokens that first surfaced in January 2023. As Binance retracted reports that the stablecoin was not fully supported, investor fears sparked a major outcry.
According to blockchain analytics provider Nansen, the circulating supply of BUSD dropped to $15.4 billion on January 25. The drop represents a $1 billion decrease from the previous week and a $2 billion decrease compared to December 2022.
Stablecoin market cap / Source: NansenThe most recent drop brought the altcoin market cap drop to $22 billion. In addition, worried investors rushed to withdraw money from Binance after Binance misrepresented the amount of digital assets in collateral reserves by consolidating institutional assets in reports.
Altcoin project’s entry challenge
While the price of Bitcoin (BTC) has risen as it has recently, stablecoins often see a drop in entry as investors sell for other assets. One way to measure the demand for stablecoins is to look at the stock market listings. According to analytics firm CryptoQuant:
The higher value indicates that investors who deposit a lot of money at once have increased recently. An increase in value for stablecoin indicates buying pressure.
This means that negative numbers indicate a decrease in buying pressure. While all stablecoins are seeing lower demand or entry, BUSD has witnessed nearly 3x more entry.
Entry of all stablecoins against BUSD / Source: CryptoQuantAs the markets continue to rise and questions about BUSD continue, the massive drop in demand could continue.
Majority of BUSD is on Binance exchange
Stablecoins see an increase in demand when used in trading pairs with altcoins. The commercial use case works on both centralized exchanges (CEX) and decentralized exchanges (DEX). An alarming statistic surrounding BUSD is the lack of stablecoin usage outside of its main exchange, Binance. $13.8 billion in BUSD is found on Binance, while the next closest number is $32.6 million in BUSD on Crypto.com. Crypto.com may be the second largest exchange for BUSD, while USDC is the largest stablecoin in the CEX with $582 million, dwarfing BUSD’s numbers.
Stablecoins on exchanges sorted by BUSD / Source: NansenThe lack of use cases after the massive drop in demand for BUSD does not bode well for the market cap if the trend continues for a long time. These two downsides, combined with SWIFT’s recent move to ban dollar transfers below $100,000 on Binance, suggest that the stablecoin may continue to face major headwinds.
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