The number of stablecoins, or dollar-pegged cryptocurrencies, held in addresses tied to centralized exchanges extended its decline to reach the lowest since May 2021 in a sign of increasing investor aversion to risk.
As of Monday, the balance was 21.06 billion, according to Glassnode data. The blockchain analytics firm tracks exchange balances for BUSD, GUSD, HSUD, DAI, USDP, EURS, SAI, sUSD, USDT and USDC.
The tally has more than halved since reaching a record high of over 44 billion in mid-December. It gathered pace following the U.S. regulatory crackdown on Paxos' BUSD in February and the subsequent USDC volatility in March.
"It's a reflection of risk aversion towards stablecoins following Paxos being told by regulators to stop issuing BUSD and the recent de-pegging of USDC," said Dick Lo, the founder and CEO of quant-driven trading firm TDX Strategies. "There has also been a steady decline in the market cap of BUSD and USDC."
Paxos stopped minting the centralized dollar-pegged stablecoin BUSD in February, complying with the regulatory order. USDC, the world's second-largest stablecoin, saw price volatility in March after issuer Circle revealed it held cash balances at the-then crisis-stricken Silicon Valley Bank.
Tether (USDT), the world's largest stablecoin by market value, has become more dominant amid the decline in the exchange balance, while BUSD and USDC have lost ground.
Lack of new money inflows
Investors have increasingly preferred stablecoins to fund crypto purchases over the past three years, because they help bypass price volatility associated with other tokens.
A dwindling stablecoin balance coinciding with a bitcoin price rise suggests the rotation of money out of stablecoins and into BTC has been the major driver of the cryptocurrency's 70% rally this year, and the market is yet to see new money inflows.
Investors parked money in stablecoins last year as the Federal Reserve's (Fed) aggressive rate-hike cycle aimed at controlling inflation boosted the appeal of the U.S. dollar and equivalents. However, the motivation to hold USD has weakened since late last year amid hopes for renewed liquidity easing.
"Activity wise, stablecoin balances on CeFi [centralized] exchanges continue to dwindle with little new incremental capital entering the ecosystem," SignalPlus, a tech firm focused on democratizing crypto options, said in a daily market report.
"Furthermore, user activity on DeFi/NFTs/GameFi remains heavily depressed despite the recovery in spot prices, reinforcing our cautious view on crypto prices in the near future," SignalPlus said.