The Future of Stablecoins: A Boom, Bust, and Cautionary Tale
Arthur Hayes, the former CEO of BitMEX, has boldly predicted a volatile cycle ahead for stablecoins, sparked by the recent successful IPO of Circle, the issuer of USDC. He foresees a surge of new publicly listed stablecoin companies, yet he cautions that the majority will fail due to fierce competition from established tech giants like Meta and Airbnb, which are likely to launch their own stablecoins.
In a recent Substack post titled "Assume the Position," Hayes elaborated on the implications of the Circle IPO, which he considers both overvalued and just the beginning of a broader frenzy around stablecoins. He anticipates that many retail investors will be drawn into this burgeoning market, only to face significant losses when the initial excitement fades.
Hayes argues that well-established Web2 companies will dominate the space, leveraging their existing social media and e-commerce platforms to create their own stablecoins. This poses a substantial challenge for newcomers attempting to establish a foothold in the market. "If they have no distribution, they have no chance of success," he warns, emphasising the importance of access to user networks that large companies already possess.
He highlights the example of Tether (USDT), whose founders were instrumental in building the Bitfinex exchange, providing them with an essential distribution channel from the outset. Similarly, Circle’s collaboration with Coinbase to enhance the distribution of USDC represents a strategic move; Circle reportedly shares a significant portion of its net interest income with Coinbase in exchange for leveraging its extensive user base.
Hayes predicts that the upcoming stablecoin bubble will burst when retail investors lose confidence in these newly publicised issuers. He asserts that this failure will stem from a fundamental misunderstanding of the mechanics of stablecoins and the historical context of their development. "The bubble will pop… using a combination of financial engineering, leverage, and amazing showmanship," he predicts, alluding to the factors he believes will mislead investors.
Despite his grim outlook on the longer-term viability of these new entrants in the stablecoin market, Hayes does not advocate for short-selling these stocks. He warns that new stocks might experience rapid price increases, causing significant losses for short-sellers. Instead, he advises potential investors to approach these investments with extreme caution, treating them like "a hot potato."
Hayes believes that while short-term trading might offer profit opportunities, the overall prognosis for new stablecoin issuers remains bleak due to their limited distribution capabilities. "There is no real future because the distribution channels for new entrants are closed,” he firmly states, urging readers to internalise the crucial dynamics of the market.
In summary, as the excitement around stablecoins swells, Arthur Hayes offers a sobering perspective on the potential pitfalls for retail investors. The imminent surge in publicly traded stablecoin issuers may present both opportunities and significant risks, underscoring the need for careful scrutiny and strategic trading in this rapidly evolving landscape.
