The Rapid Growth of Stablecoins
In October last year, the total market capitalization of stablecoins stood at just $170 billion. Fast forward to today, and that figure has ballooned to **$230 billion—a 35% increase in just over half a year**. This explosive growth underscores stablecoins' rising significance in macroeconomic research.
Stablecoins like USDT and USDC operate on a simple model: "Pledge $1, issue $1 stablecoin." Issuers invest the collateralized U.S. dollars into short-term U.S. Treasury bonds and money market funds, earning interest as revenue.
- USDT: $150 billion market cap, holding ~$100 billion in 3-month U.S. bonds + $20 billion in reverse repos/money market funds.
- USDC: $58.6 billion market cap, with $24 billion in 3-month U.S. bonds + $30.4 billion in reverse repos.
Combined, these two stablecoins hold nearly as much U.S. debt as South Korea.
How Stablecoins Influence Interest Rates
A recent BIS study revealed key insights:
- Yield Suppression: Every $3.5 billion net inflow into stablecoins reduces 3-month Treasury yields by 2–2.5 basis points within 10 days.
- Asymmetric Effect: Outflows of the same size can spike yields by 6–8 basis points.
- Short-Term Focus: The impact is strongest on the short end of the yield curve (long-term bonds remain unaffected).
- Dominance of USDT: Accounts for 70% of this yield suppression due to its massive scale.
From Q1 2024 to Q1 2025, USDT and USDC increased their U.S. bond holdings by **$35.3 billion**—outpacing entire nations like the U.K. (+$42.9B) and Canada (+$56.8B), while Japan reduced holdings (-$36.2B).
The Two Types of Players in the U.S. Bond Market
NBER research categorizes U.S. bond market participants:
Granular-Demand Investors:
- Banks, insurers, pension funds, etc.
- Driven by regulatory needs or income targets.
- Demand is price-insensitive.
Arbitrageurs:
- Hedge funds, market makers.
- Absorb market imbalances and price risk.
- Crucial for short-term Treasury liquidity.
Stablecoin issuers, with their need for ultra-liquid assets (e.g., 3-month Treasuries), fall into the first group. Their expansion is creating a structural force that depresses short-term rates.
Stablecoins and Money Supply
When $1 moves from a bank account to a stablecoin:
- Traditional metrics (M1/M2) shrink, but real purchasing power stays intact.
- If used for payments (not just trading), velocity (V) could surpass traditional money.
👉 Why stablecoins are reshaping finance
FAQ
Q: Why do stablecoins mainly affect short-term rates?
A: Issuers prioritize liquidity, so they buy short-dated Treasuries—long-term bonds are too risky.
Q: How does USDT dominate this effect?
A: Its $150B market cap means marginal flows have outsized impact vs. smaller stablecoins.
Q: Could stablecoins replace fiat currencies?
A: Unlikely soon—regulatory hurdles and adoption barriers remain high, but their efficiency is undeniable.