At the end of 2024, financial markets will experience significant changes, particularly in the world of cryptocurrencies. As crypto investors profit, many are withdrawing assets from more volatile assets, such as Bitcoin, for safer options such as real-world asset (“RWA”) tokens – symbolic representations of assets physical assets traded on a blockchain, and stablecoins – assets linked to traditional assets. currencies like the US dollar. The regulation of digital currencies is an ongoing concern for federal and state regulators (already discussed here, here and here). As stablecoin and RWA products gain popularity among consumers, it will be interesting to see how consumer credit regulators choose to address the new risks posed by these products.
Stablecoins in particular are increasingly seen as critical financial infrastructure, a trend highlighted by several major fintech companies launching new stablecoin-related products. Stablecoins are often deployed by investors on decentralized finance (“DeFi”) platforms to generate yield as part of a fixed income strategy.
As markets rise, investors tend to spend more and look for ways to amplify their gains. This is evident in the crypto space, where borrowing to increase exposure – called leverage – is becoming increasingly popular. In traditional finance, this may involve taking out a margin loan; In crypto, DeFi platforms allow users to borrow stablecoins like USDC against their crypto holdings. These loans often offer lenders high interest rates, sometimes exceeding 10%. Another way to profit from crypto is through perpetual contracts, a type of financial product similar to options but without an expiration date. The cost to users of maintaining these contracts is called the funding rate, which reflects the market’s appetite for long positions in an asset. The demand for leverage keeps funding rates consistently high.
Synthetic Dollar Products
Synthetic dollar products – which combine exposure to market dynamics, such as asset price movements, with a dollar-indexed derivative – take advantage of investor demand for long positions. By pooling exposure to long positions with a USD-pegged derivative, they can offer returns of around 25%, much higher than the 10-15% seen on popular DeFi platforms. This approach mirrors traditional financial tools like derivatives, but adapts them to the crypto space. The success of synthetic dollar-structured products is evident, with total assets in one product growing to $4 billion in just one year.
The future of crypto and stablecoins
As investors look to secure their gains, growing wealth from crypto investments is expected to flow toward lower-risk assets, including stablecoins and RWA tokens. Commentators believe that the stablecoin market, currently valued at over $200 billion, could potentially reach $500 billion or even $1 trillion by the end of 2025, due to the technology’s growing role in retail and institutional finance.
Despite this growth, the crypto market remains inefficient, with unclear pricing and limited regulation. For example, the stablecoin project that currently holds the largest share of the stablecoin market puts little effort into complying with regulatory frameworks. Nonetheless, the recent crypto boom is reshaping financial markets, creating new opportunities and challenges as the gap between traditional finance and crypto is bridged.
*Disclaimer: This article is for informational purposes only and does not constitute investment advice. Please consult a qualified financial advisor before making any investment decisions.
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Alexander Lazar also contributed to this article.
