Stablecoins Won Crypto Markets in January – With 0% Returns

In January, stablecoins were the place to be.

Among cryptocurrencies with over $10 billion in market cap, the top four performers during the month were all stablecoins: By simply holding their peg to the dollar, those digital assets avoided one of the worst-ever starts to the year in cryptocurrency markets, as bitcoin fell 17%.

Tether’s UST rose 0.02% during the month, Binance USD (BUSD) was unchanged, Circle’s USD Coin slipped 0.03%, and Terra USD (UST) slid 0.14%.

In other words, they held their value – the crypto equivalent of sitting in cash while the most popular crypto assets took big losses. Ether (ETH), the native cryptocurrency of the Ethereum blockchain, tumbled 25%.

Many of the biggest crypto assets were coming off impressive rallies in the fourth quarter, as bitcoin rose to its all-time-high price of almost $69,000 in November. In a sign of how volatile cryptocurrencies are, bitcoin has fallen by over 40% since then and was recently changing hands at around $38,500.

In this market, the roughly flat return of major stablecoins versus the dollar might feel like upside.

“Stablecoins are used in volatile months to trade around volatility,” said Joe DiPasquale, CEO of BitBull Capital “When markets were choppy, we flew to safety in the stablecoin, then went in and out around small price changes.”

Ulrik Lykke, director of Marlin & Spike, a boutique investment firm and consultancy specialized in crypto, noted that stablecoins also can be "used as productive assets for generating attractive yield.”

Some of the recent interest in stablecoins might be tied to the strength of the U.S. dollar in global foreign-exchange markets.

Last week, the Federal Reserve hinted at three possible interest rate hikes starting in March, but economists are now expecting more than that, with Bank of America going as far as predicting seven quarter-percentage-point hikes this year from the current level around 0%.

Fed monetary tightening tends to make fixed-income assets in the U.S. more attractive, which in turn drives up the allure of the U.S. dollar compared with other major currencies.

With the Fed just beginning its campaign to thwart fast inflation, a strong dollar could persist throughout 2022, giving crypto traders more reason to park their funds in dollar-pegged stablecoins.

On the regulatory front, the U.S. House of Representatives' Financial Services Committee will hold a virtual hearing on Feb. 8 to discuss stablecoins, which could provide further guidance on how stablecoins will be regulated in the future.