The number of dollar-pegged stablecoins held at addresses linked to centralized exchanges has continued to decline, reaching its lowest level since May 2021. This is a sign that investors are becoming more risk averse.

Glassnode data shows that the balance as of Monday was 21.06 billion. The blockchain analytics company tracks the exchange balances of BUSD, GUSD USD, HSUD DAI USDP EURS SAI SAI, sUSD USDT USDC.

Since mid-December, when the tally reached a record of 44 billion dollars, it has been more than halved. The pace of the market increased after the U.S. crackdown on Paxos BUSD in late February, and the USDC volatility that followed in early March.

Dick Lo, founder and CEO at quant-driven trading company TDX Strategies, said that the decline in market cap of BUSD and USDC is a reflection of the risk aversion toward stablecoins after Paxos was told by regulators not to issue BUSD anymore and USDC’s recent de-pegging. The market capitalization of BUSD, USDC and other stablecoins has been steadily declining.

Paxos complied with New York’s regulatory order in February by ceasing to mint for the dollar-pegged BUSD stablecoin. USDC, the second largest stablecoin in the world, experienced volatility after its issuer Circle disclosed that it had cash balances with the Silicon Valley Bank, which was then a crisis-hit.

The exchange balance has declined, and Tether (USDT), which is the largest stablecoin in terms of market value, has gained more ground. BUSD, however, has lost ground.

Inflows of new money

In the last three years, investors have increasingly used stablecoins as a way to fund their crypto purchases because they can avoid price volatility.

The dwindling balance of stablecoins coincides with the rise in bitcoin’s price. This suggests that the main driver behind the crypto’s 70% increase this year was the rotation of funds out of stablecoins into BTC. The market is yet to see any new money flows.

Last year, investors accumulated money in stablecoins as the Federal Reserve’s aggressive rate-hike cycles aimed at controlling the inflation increased the appeal of the U.S. Dollar (USD) or its equivalents. The motivation to hold USD is waning since the end of last year, amid renewed hopes for liquidity ease.

SignalPlus, an IT firm focused on democratizing cryptocurrency options, reported in a daily report that “activity-wise, stablecoins balances on CeFi exchanges [centralized] continue to shrink with little new capital entering the eco-system.”

SignalPlus stated that “Furthermore the user activity on DeFi/[non fungible tokens]/GameFi is still heavily depressed, despite the recovery of spot prices. This reinforces our cautious outlook on crypto prices for the near future.”

Sheldon Reback is the editor.