Abstract: This study reviews the current state of empirical literature on stablecoins. Based on a sample of 22 peer-reviewed articles, we analyze statistical approaches, data sources, variables and metrics as well as stablecoins types investigated and future research avenues. The analysis reveals three major clusters: (1) Studies on the stability or volatility of different stablecoins, their designs and safe haven-properties, (2) the interrelations of stablecoins with other crypto assets and markets, specifically Bitcoin and (3) the relationship of stablecoins with (non-crypto) macroeconomic factors. Based on our analysis, we note that future research should explore diverse methodological approaches, data sources, different stablecoins or more granular datasets, and arrive at four significant topics that we consider most significant and promising: (1) the use of stablecoins in emerging markets, (2) the effect of stablecoins on the stability of currencies, (3) analyses of stablecoin users, (4) adoption and use cases of stablecoins outside of crypto markets and (5) algorithmic stablecoins.

Keywords: Stable coin, Stablecoin, Tether, Bitcoin, Cryptocurrency, Cash

Abstract: Stablecoins are digital currencies that peg to non-volatile values, such as most commonly fiat currency. Yet unlike fiat currency, stablecoins are fully transparent: every transfer is recorded on a public blockchain. In this regard, they can serve as a valuable case study of the disruptive effect which transparent money flows could have on financial markets. This study analyzes how 1,587 stablecoin transfers of $1 million or more between April 2019 and March 2020 affected Bitcoin returns and trading volume. It finds highly significant positive abnormal trading volume and significant abnormal returns in the hours around stablecoin transfers. The sender and receiver of each transfer are categorized as (1) unknown, (2) cryptocurrency exchange or (3) stablecoin treasury. The effects on trading volume and returns differ across the resulting nine subsamples, which suggests that market participants presume different transfer motives and varying degrees of information asymmetry for each sender-receiver combination. The findings illustrate the feedback effects between cryptocurrency markets and stablecoin usage and suggest that transparent money flows have the potential to increase market efficiency.

Keywords: Market efficiency, Informational efficiency, Price discovery, Asset pricing, Event study, Transaction activity, Tether, Feedback trading

Other: Presented under the name “Monetary flows and feedback trading in cryptocurrency markets: Effects of stablecoin transfers on Bitcoin returns and trading volume” at The 2nd Crypto Asset Lab Conference (CAL2020) by the Crypto Asset Lab of Università Milano-Bicocca, organised jointly with the Joint Research Centre is the European Commission’s science and knowledge service.

Abstract: Stablecoins are digital currencies that are pegged to non-volatile assets. As alternatives to fiat currencies, they constitute an important aspect of cryptocurrency markets. We analyze returns of cryptocurrencies around 565 stablecoin issuances events for seven different stablecoins between April 2019 and March 2020. Our event study reveals market downturns in the week before issuance and positive abnormal returns in the twenty-four hours around the issuance. Effects differ and remain insignificant for some stablecoin subsamples and issuance size does not significantly affect the abnormal returns. We conclude that stablecoin issuances contribute to price discovery and market efficiency of cryptocurrencies.

Keywords: market efficiency; price discovery; asset pricing; tether; bitcoin; ethereum

Abstract: This chapter introduces the concept of stablecoins such as Tether, DAI, or Ampleforth. It also provides a taxonomy of the different types of stablecoins consisting of (1) traditional asset-backed stablecoins, (2) crypto-collateralized stablecoins, and (3) algorithmic stablecoins and seigniorage shares. The chapter continues with a brief history of stablecoins, starting from BitShares as the first stablecoin implementation over Tether and market-wide stablecoin adoption to Facebook-initiated Diem. Next, the chapter explains the impact of stablecoins on cryptocurrencies and other markets and discusses trends and challenges facing stablecoins. The chapter provides a basic understanding of stablecoins, their defining characteristics, challenges, and markets.