ZIRP policies and risk of inflation could boost demand for stablecoins, cryptocurrencies

Zero or negative interest rates policies currently undertaken by global central banks could lead to a greater demand for stablecoins and for cryptocurrencies more generally, because now there’s no opportunity cost when it comes to holding USD-backed stablecoins, as opposed to holding USD in a bank, something which will no longer provide interest. Furthermore, likely volatility in the crypto market will generate additional demand for stablecoins, since they provide a buffer against inflation. Also USD inflation could create greater demand for non-stablecoin cryptocurrencies, and stablecoins may also witness further inflows. This is the theory spoused by Simon Chandler (Cryptonews.com).
Let’s look at some simple data. The market capitalization for most USD-based stablecoins had increased considerably over the last month, because zero USD interest rates are making stablecoins more attractive to investors. While the total cryptocurrency market capitalization has lost -45% month to date, the stablecoins capitalization keep growing.
Rates have been 10 times below normal stablecoin lending rates. But this hasn’t caused massive inflow. There is a chance that global inflows into stablecoins will increase as a zero-percent interest rate policies go on, Chandler writes.
Investors may turn to stablecoins, as most of them do not charge negative interest. Demand for USD-pegged stablecoins could rise, but this would depend on a number of factors besides zero interest rates. Stablecoins are not immune to the fluctuations of their underlying pegged assets (gold, a particular fiat currency, real estate, some other commodity). This suggests that holding a USD-backed stablecoin is unlikely to be a scaleable, long-term manner of escaping the impacts of a potential negative interest rate scenario for the US dollar.
Should inflation increse, there will be a broader turn towards alternative assets including cryptocurrencies as a hedge against price increases. Stablecoins, enabling easy onboarding and facilitate trading, would likely benefit, even if indirectly as opposed to as a result of traders specifically looking to gain exposure to stablecoins.
But if zero USD interest rates won’t result in greater stablecoin inflows, how can we explain the fact that stablecoin market capitalizations have risen over the past month? The challenge comes in isolating this growth from the general decline in the price of major cryptocurrencies over roughly this same period, which we would also expect to incite a move towards stablecoins as people attempt to sidestep ongoing or feared declines.
While not tightly correlated, stablecoin volumes are typically affected by bitcoin volatility and dollar-denominated price, as the primary purpose of these assets remains the on-off boarding into cryptoassets. This might be deflating news for anyone hoping for some kind of stablecoin rally. A climate of zero interest rates will boost crypto in general, provided that the coronavirus downturn isn’t too protracted.

Related Articles

Crypto carry trade (part one)
The current international monetary environment is characterized by ultra-expansionary monetary policies undertaken by…

Read more >
Passive and Aggressive orders
In forex trading, traders often use passive and aggressive orders in their daily…

Read more >
The Rate-of-Change (ROC)
In the technical analysis of forex markets, the Rate-of-Change (ROC) is a momentum…

Read more >