runs on stablecoins

The Impact of Stablecoin Runs on the Cryptocurrency Market: A Comprehensive Analysis

Ever heard of stablecoins? Think of them as the chill cousins in the wild crypto family. While most cryptocurrencies are like rollercoasters with their ups and downs, stablecoins are like the calm teacup ride, trying to keep things steady. They’re digital currencies that hitch their wagon to stable stuff, like regular money (fiat) or even gold. Why? To avoid the crazy crypto mood swings, of course!

But here’s the twist: even these “stable” coins can have their drama moments. Enter: stablecoin runs. It’s like when there’s a sale on your favorite online store, and everyone’s rushing to grab the best deals, causing the site to crash. Similarly, when there’s a run on stablecoins, it can shake up the entire crypto market.

In this fun ride of an article, we’ll dive deep into:

  • The different flavors of stablecoins (because variety is the spice of life! 🌶️)
  • The good, the bad, and the ugly of these coins.
  • Why sometimes even the chill cousins have their drama episodes.
  • Real-life crypto soap operas featuring stablecoin runs and their market mayhem.

So, buckle up, and let’s get started on this crypto adventure! 🚀🎢

comparison chart of different type of stablecoins

Types of Stablecoins

Okay, crypto enthusiasts, gather ’round! Let’s talk about the three musketeers of the stablecoin world. Yep, there are three main types, and each one’s got its own flavor. 🍦

  1. Fiat-Backed Stablecoins: These are the “I’ve got cash in the bank” kind. They’re like those gift cards you get that are worth exact cash amounts. So, for every stablecoin, there’s real money like dollars or euros chilling in a bank somewhere. Ever heard of Tether (USDT) or USD Coin (USDC)? Yep, they’re part of this squad.
  2. Commodity-Backed Stablecoins: These coins are living the luxe life. They’re backed by shiny things like gold or silver. It’s like having a treasure chest, but in digital form. Some of the glittery members of this group? Tether Gold (XAUT) and Paxos Gold (PAXG). Bling bling! 💍
  3. Algorithmic Stablecoins: Now, these are the brainy ones. No cash, no gold, just pure, nerdy math. They use super-smart algorithms to keep their value stable. Think of them as the tech geeks of the stablecoin world. Some of the smarty pants in this category? Dai (DAI) and Terra (LUNA).

Advantages and Disadvantages of Stablecoins

Stablecoins, with their promise of steadiness in the wild world of crypto, come with their own set of pros and cons. Let’s break it down:

The Upsides

  1. Steady Eddie: Unlike their more volatile crypto cousins, stablecoins aim to keep things stable. That means fewer heart-stopping price swings.
  2. User-Friendly: They’re easy to use and get your hands on, making them a great entry point for crypto newbies.
  3. Worldwide Welcome: With the internet as their playground, stablecoins have a global reach, connecting people and markets from all corners of the world.

The Downsides

  1. Counterparty Risk: This is the “what if they can’t pay up?” concern. If the entity backing the stablecoin faces issues (like going bankrupt), it could spell trouble for the coin’s value and its holders.
  2. Regulatory Rollercoaster: The world of stablecoins is a bit like the Wild West when it comes to regulations. Different places have different rules, and sometimes, there aren’t any clear rules at all. This can lead to a lot of head-scratching and inconsistencies.
  3. Market Manipulation: With a few big players holding a lot of coins, there’s a risk that they could sway the market in their favor. Imagine a few whales making big moves and causing ripples throughout the pond.
Percentage of stablecoins in cryptocurrency market cap
Percentage of stablecoins in cryptocurrency market cap

Role of Stablecoins in the Cryptocurrency Market

In the bustling metropolis of Cryptocurrency, think of stablecoins as the reliable subway system. They might not have the glitz and glamour of a flashy sports car (hello, Bitcoin), but they’re the backbone that keeps the city moving smoothly.

Stablecoins are the trusty means of exchange, offering a steadier ride in a market known for its rollercoaster-like ups and downs. They’re the safe haven where folks park their funds, knowing they won’t wake up to any wild price swings.

But their role doesn’t stop there. They’re also the dynamic duo for other cryptocurrencies. When you’re trading in the crypto market, stablecoins are often the go-to partner, providing the liquidity that keeps trades flowing smoothly. It’s like having a dependable dance partner in a fast-paced tango.

And speaking of pace, the use of stablecoins has been picking up speed. Over recent years, their role in the crypto market has grown so much that some, like Tether, have hit the high notes with a market capitalization in the billions.

So, while they might not always grab the headlines, stablecoins are the steady beat that keeps the crypto rhythm going.

Reasons behind Runs on Stablecoins

Runs on stablecoins can occur due to several reasons, including loss of confidence in the stablecoin’s peg, lack of liquidity, market manipulation, and large sell orders triggering a cascade of selling.

In the crypto realm, stablecoins are usually the calm ones in the room. But every now and then, they get a case of the jitters. So, what’s causing this unexpected dance?

A big factor is a confidence crisis. Imagine whispers going around that the vault backing your favorite stablecoin isn’t as full as it claims to be, or there are concerns about the company behind the coin. This can lead to people second-guessing their trust in that stablecoin.

Then there’s the issue of liquidity. If a stablecoin isn’t being traded widely, it’s like trying to exchange a rare collectible. It becomes harder to buy or sell, especially in large amounts.

Market manipulation is another sneaky culprit. If someone with a hefty chunk of a particular stablecoin decides to play puppeteer with its value, it can cause ripples throughout the market.

Lastly, imagine a big player deciding to sell a significant portion of their stablecoin stash. This move can trigger what’s known as a cascade of selling. It’s like one person shouting “fire” in a theater, causing a rush even if there’s no smoke.

So, while stablecoins aim to be the steady hand in the unpredictable world of cryptocurrency, they’re not immune to a little drama now and then.

StablecoinDate of RunCause of RunImpact on the Market
Tether (USDT)October 2018Loss of confidence in the stablecoin’s pegSignificant decline in the price of Bitcoin and other cryptocurrencies
Iron Finance (TITAN)June 2021Iron.Finance lacked a proper stabilizing mechanismSignificant decline in the price of Bitcoin and other cryptocurrencies
UST & LUNAMay 2022Over $2 billion worth of UST was unstaked (taken off the Anchor Protocol), and hundreds of millions of it were quickly liquidatedSignificant decline in the price of Bitcoin and other cryptocurrencies

Example of Stablecoin Runs and Their Impact on the Market

On June 16, 2021, the crypto community watched in disbelief as Iron.Finance faced a major setback. TITAN, the governance token that backs the IRON stablecoin, crashed nearly 100%. As a result, IRON, which was designed to be stable, deviated from its peg.

The root of the problem? A design flaw in Iron.Finance. They lacked a robust stabilizing mechanism. When TITAN’s value began to plummet, the prices from their Price Feed Oracle couldn’t keep up with real-time data. This lag made arbitrage, which Iron.Finance relied on for stabilizing IRON’s price, unprofitable.

TITAN, with its infinite supply, was primarily used as collateral when minting IRON. The system allowed any user to issue IRON, backed by their USDC and TITAN holdings. Iron.Finance’s stabilization strategy hinged on the assumption that arbitrage users would step in during price dips, buying undervalued IRON and redeeming it for profit.

However, on June 16, this mechanism faltered. As TITAN’s price dropped to zero, IRON’s value also decreased to around $0.94—a significant deviation for a stablecoin. To prevent further complications, Iron.Finance suspended both minting and redeeming

Impact of Stablecoin Run

The Iron.Finance incident wasn’t an isolated event contained within its own bubble. It reverberated throughout the crypto ecosystem, causing a series of reactions. The most immediate fallout was a palpable loss of trust. When a stablecoin, which is essentially the poster child for reliability in the crypto world, stumbles, it naturally makes investors jittery. Doubts began to surface about the dependability of other stablecoins and the very mechanisms that underpin them.

This mistrust led to heightened scrutiny. Regulatory bodies and market watchers started taking a closer look at the inner workings of various stablecoin projects, leading to calls for clearer guidelines and more transparency in the sector.

Furthermore, the incident served as a cautionary tale for other projects. Crypto developers and platforms began re-evaluating their stabilization mechanisms, keen on avoiding a repeat of the Iron.Finance scenario.

Comparison of Stablecoins to Traditional Currencies and Assets

Stablecoins, with their digital charm, bring to the table some perks like swifter transaction times and pocket-friendly transaction costs. On the flip side, they’re grappling with issues like regulatory gray areas, a sometimes foggy transparency scene, and the ever-present counterparty risk. Meanwhile, our good old traditional currencies and assets, though slower, offer a comforting blanket of stability and security. But remember, they’re not immune to the whims of inflation and other economic mood swings.

Case Study: John’s Rollercoaster Ride with a Stablecoin

Meet John, a crypto enthusiast who thought he’d found the calm in the crypto storm with stablecoins. The promise of stability and transaction ease had him hooked. But 2019 had other plans. John watched in disbelief as his chosen fiat-backed stablecoin, which had been lounging at $1, took a dive to $0.95. Panic mode on, John tried to jump ship, only to find his exchange had pulled down the shutters on withdrawals. By the time he could act, he was selling at $0.85 a pop.

While the stablecoin did find its footing again, John’s trust took a hit. His takeaway? Stablecoins, while promising stability, aren’t immune to the wild dances of the market. It’s a tale that underscores the importance of understanding the nuances and risks before diving into the stablecoin pool.

stablecoin price fluctuation chart example
stablecoin price fluctuation chart example

Future of Stablecoins and Their Potential Impact on the Financial Industry

Stablecoins have the potential to facilitate cross-border transactions and compete with traditional currencies and payment systems. However, they also pose several regulatory challenges and concerns about systemic risk. The growth of stablecoins and their potential impact on the financial industry is an area of active research and debate.

Risks Associated with Investing in Stablecoins

Investing in stablecoins poses several risks, including counterparty risk, liquidity risk, and market risk. Counterparty risk refers to the risk that the entity backing the stablecoin will default or become insolvent, leading to a loss of value for the stablecoin holders. Liquidity risk refers to the risk that the stablecoin is not widely traded, making it difficult to buy or sell. Market risk refers to the risk of price volatility and loss of confidence in the stablecoin’s peg.

In conclusion, stablecoins have gained popularity in recent years due to their potential to provide a stable store of value and a means of exchange. However, runs on stablecoins can have a significant impact on the cryptocurrency market. Understanding the types of stablecoins, their advantages and disadvantages, the reasons behind runs on stablecoins, and the potential impact of stablecoins on the financial industry is crucial for investors and regulators alike.


What are stablecoins?

Stablecoins are cryptocurrencies pegged to a stable asset like the US dollar.

Who can benefit from using stablecoins?

Anyone who wants to avoid the volatility of other cryptocurrencies.

How do stablecoins work?

Stablecoins maintain their value by being backed by reserves of the asset they’re pegged to.

What are some popular stablecoins?

Tether, USD Coin, Dai, and TrueUSD are some of the most popular stablecoins.

How can I use stablecoins?

Stablecoins can be used for everyday transactions, trading, and as a store of value.

What if I don’t trust stablecoins?

It’s important to do your own research and choose a reputable stablecoin issuer.