Crypto: $625M Lost For Tether And Stablecoins!

As the Federal Reserve (Fed) starts to change course on interest rates, Tether and four other stablecoin issuers risk seeing $625 million in annual interest income melt away. This upheaval, revealed by a recent CCData report, highlights stablecoins’ reliance on U.S. Treasury bonds, a crucial pillar of their economic model.

The Fed Changes Course: An Earthquake for Stablecoins

Since the rise of stablecoins, these cryptocurrencies backed by real assets have positioned themselves as pillars of stability in the ecosystem.

But their success largely hinges on the investment strategy in U.S. Treasury bonds, assets renowned for their safety and returns. However, the Fed’s recent decision to lower interest rates shuffles the deck.

Indeed, when interest rates drop, the yields on Treasury bonds also fall. For issuers like Tether, whose reserves are nearly 80% made up of Treasury bonds, this means an immediate reduction in revenue generated from these investments.

According to CCData, this drop could cost the stablecoin industry around $625 million, a staggering figure that reflects the extent of their dependence on U.S. monetary policy.

The numbers speak for themselves: Tether, the undisputed leader of stablecoins with $93.2 billion in assets under management, is particularly exposed.

Their record profits for the first half of 2024, reaching $5.2 billion, largely rely on the returns from their U.S. government bonds. Now, these revenues face a serious threat.

Diversification: The Future of Stablecoins?

Faced with this threat, the question arises: can stablecoins continue to thrive by relying solely on Treasury bonds? Some signs suggest that stablecoin issuers like Tether have already begun diversification strategies to mitigate this vulnerability.

Tether recently invested more than $112 million in an agribusiness company in Argentina, a move that, although surprising for a crypto company, illustrates a willingness to diversify their income.

This investment in agribusiness reflects a growing trend among stablecoin issuers to explore sectors outside finance to secure new sources of revenue. The question remains: will this diversification be enough to offset the loss of Treasury bond yields?

Meanwhile, other cryptos, such as Circle’s USDC, are in a similar position. With $28.7 billion in Treasury bonds, USDC finds itself in a comparable situation to Tether. However, Circle is betting on more dynamic fund management, notably through its Circle Reserve Fund, to mitigate the impact of the rate drop.

Towards a Changing Economic Model?

The Fed’s decision deserves particular attention. This change could mark a turning point in the stablecoin economy.

Interest income from Treasury bonds has long been a major source of profits for these companies, allowing them to function while ensuring the stability of their tokens. If these revenues decrease, it could force issuers to rethink their economic model.

One option for stablecoin issuers would be to increase their service fees or explore new investment avenues.

However, this poses challenges: how to maintain user trust while adapting their model to a lower interest rate environment? If Tether, Circle, and other stablecoins fail to find viable alternatives, they risk losing competitiveness to other decentralized finance players, less reliant on traditional assets.

Pressure is mounting, and eyes are now turned towards the future strategies of stablecoin issuers. Will they withstand this storm, or will they have to yield ground to more agile alternatives? The stablecoin sector faces a significant challenge with this Fed decision. While $625 million in losses may seem bearable in the short term for giants like Tether, the question of their long-term resilience remains open. The economic model that led to their success now seems threatened. Meanwhile, Bitcoin and altcoins are collapsing dramatically.