How do Stablecoin Issuances affect Cryptocurrency Markets?
This blog post is based on the BRL Working Paper “The Influence of Stablecoin Issuances on Cryptocurrency Markets” by our researchers Lennart Ante, Dr. Ingo Fiedler and Dr. Elias Strehle. Read the full paper here.
Stablecoins are digital currencies whose value is pegged to fiat currencies like the dollar. As Blockchain-based tokens they allow for fast transactions at low costs and are used especially by cryptocurrency traders. Today, over $10 billion in stablecoins are circulating. In our latest working paper, we analyze the influence of stablecoin issuances on the returns of major cryptocurrencies and conclude that stablecoins contribute to price discovery and market efficiency of cryptocurrencies.
We find that the issuance of stablecoins follows cryptocurrency market downturns. The negative price trend stops on the day before the issuance and yields a positive abnormal return in the twenty-four hours before and after the issuance. “Abnormal” is a technical term of event studies that refers to the difference between then observed return over an event window (here the hours around the issuance) and the average historic returns over an estimation window (here the week before the issuance). Therefore, the term does not necessarily imply that the absolute return is positive.
Abnormal log returns of major cryptocurrencies around 565 issuance events of stablecoins