With stablecoins now a $177 billion market, they have arguably become the most dominant application of crypto technology — but what’s next for the nascent industry?

Stablecoins have undoubtedly found product market fit, generating more than $5.1 trillion worth of global transactions in the first half of this year alone, according to analysts at crypto asset manager Bitwise. That’s comparable to Visa’s $6.5 trillion over the same period, with a further $3.1 trillion generated by stablecoin transactions in the third quarter alone.

“We always say that crypto is on the brink of finding its killer use case. Well, here it is,” Bitwise’s Juan Leon and Ari Bookman wrote in a Tuesday report.

Stablecoin transactions. Image: Bitwise.

Leon and Bookman point out that major corporations like PayPal have now launched their own stablecoins, with Ripple, Revolut, and Robinhood also looking to get in on the game. The technology is being discussed at the highest levels of government, and just yesterday, payments giant Stripe confirmed its $1.1 billion acquisition of the stablecoin API firm Bridge — the largest in crypto history. The Stripe deal alone validates the usage and growth of stablecoins as a legitimate use case for public blockchains, according to analysts at research and brokerage firm Bernstein.

“As stablecoins find utility beyond crypto for businesses and global corporations which have cross-border transactions, abstracting away the blockchain becomes critical for wider adoption,” Bernstein digital asset lead Gautam Chhugani wrote in a note to clients on Tuesday. “Thus, players such as Bridge play an important role by building API software for businesses to integrate stablecoin payments within their regular payments experience.”

Stablecoins provide U.S. dollar savings access to international users, provide a base currency for crypto trading, are increasingly integrated with fintech platforms, provide the cheapest cross-border payment rails, and are becoming “systemically important” — they are now the 18th largest holder of U.S Treasuries alongside large sovereigns, Chhugani added. The top five stablecoins now hold more U.S. Treasuries than some G20 nations, like South Korea and Germany, according to Bitwise's analysts. This growth in stablecoins creates new demand for U.S. debt and enhances liquidity in the U.S. Treasury market, benefiting the broader financial system, they said.

Holders of U.S. Treasuries: Stablecoins vs. top foreign holders. Image: Bitwise.

Why is this happening? The business model is just too good, Leon and Bookman explained.

Issuers take in U.S. dollars and issue an equivalent amount of stablecoins in return. They then use that fiat currency to buy U.S. Treasuries and other yield-bearing assets, pocketing the interest. As an example, Tether, the largest stablecoin issuer with a circulating supply of around $126 billion in USDT, made more profit last year than the global asset management giant BlackRock, the analysts said.

Obviously, the clue is in the name, and investors aren’t going to make a return from simply holding stablecoins. In fact, they’re still subject to the same inflationary pressures of their underlying fiat peg. However, they can provide investment opportunities in the form of public companies, an alternative to money market accounts and value accruing to their underlying networks, Leon and Bookman said.

Tether’s largest competitor, USDC issuer Circle, confidentially filed for an IPO in January, and companies like Visa and PayPal are already integrating stablecoins into their operations to gain a competitive edge. The Bitwise analysts expect to see more banks and payment processors entering the space, providing further investment opportunities in public companies exposed to stablecoin’s growth potential.

Additionally, while most stablecoins act like static cash, if issuers shared profits from their treasury reserves as interest, they could rival money market funds — a $6.3 trillion industry — Leon and Bookman said. This would make stablecoins a compelling option for advisors and portfolios, and with stablecoin regulation under discussion in Congress, it's something worth watching, they added.

Finally, as most activity occurs on Ethereum, stablecoins can also help drive the network's growth, indirectly boosting the price of ether as a further investment opportunity, the Bitwise analysts said. However, that works both ways, of course, and ether could suffer if the stablecoin market declined.

With liquid deposits in the U.S. worth approximately $18 trillion and stablecoins representing just 1% of that market, Bitwise analysts asked: “What happens to that relative market share if we see the large-scale approval of interest-bearing stablecoins or a clearer regulatory framework?"

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