Token-Supported Assets: Velocity - a Gauge for Liquidness Measurement
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In a guest article published by The Sortino Group, it is revealed that asset-backed tokens, such as Tether (USDT), demonstrate significantly higher liquidity compared to traditional securities and top cryptocurrencies. This is primarily due to their transactional nature and the reduced volatility risk associated with them.
Tether, a stablecoin pegged 1:1 to the US Dollar, has a velocity of around 12, meaning that each token gets traded about 12 times per month. This is notably higher than the velocity of Bitcoin (~0.75) and Ethereum (~1.4), which are often treated as stores of value or speculative assets.
The elevated velocity of Tether can be attributed to several factors:
- Use Case: Tether is extensively used for payments, remittances, and as a convenient medium for trading cryptocurrencies on exchanges. It serves as a dollar substitute on the blockchain, facilitating swift and low-cost transfers.
- Design: Being pegged and stable against the US Dollar, Tether reduces exposure to volatility risk, encouraging frequent transactional use instead of hoarding.
- Ecosystem and Infrastructure: Advancements in blockchain scalability, wallet technologies, and regulatory-compliant custody have made transferring and holding such tokens safer, faster, and more efficient, promoting continuous circulation.
- Settlement Efficiency: Tokenized stablecoins eliminate traditional banking delays by enabling near-instant settlement on blockchains, which encourages more frequent transactions compared to legacy securities or volatile cryptocurrencies that require longer settlement and have higher risk.
In contrast, traditional securities and large cryptocurrencies like Bitcoin are typically held for investment appreciation rather than daily transactional use, leading to much lower velocities.
Another asset-backed token, True USD, also exhibits a velocity of 19%. It is worth noting that the correlation between liquidity and volatility in the crypto markets is high, with lower liquidity leading to higher volatility.
Stable coins, such as Tether, offer a secure haven in the otherwise volatile and risky crypto market. They provide a means for transactions without the fear of price fluctuations, making them an attractive option for businesses and individuals seeking a more stable digital currency.
The article's views do not necessarily reflect the views of AlphaWeek or The Sortino Group. For information about reprints from AlphaWeek, please click the specific link provided.
[1] Improvements in blockchain scalability, wallet technologies, and regulatory-compliant custody have made transferring and holding such tokens safer, faster, and more efficient, promoting continuous circulation.
[2] Being pegged and stable against the USD, Tether reduces exposure to volatility risk, encouraging frequent transactional use instead of hoarding.
[3] Tokenized stablecoins eliminate traditional banking delays by enabling near-instant settlement on blockchains, which encourages more frequent transactions compared to legacy securities or volatile cryptocurrencies that require longer settlement and have higher risk.
Institutional investors can find appealing investment opportunities in the accelerating adoption of stablecoins like Tether, given their increased liquidity and reductions in volatility risk compared to traditional securities and top cryptocurrencies. The improving technology and infrastructure in the blockchain ecosystem, such as advancements in scalability, wallet technologies, and regulatory-compliant custody, have made tokenized stablecoins more efficient for frequent transactions in the digital finance landscape.
