Crypto Crossroads: Bitcoin’s Struggles, Stablecoin Growth, and Implications for USD Leadership

• Bitcoin remains a speculative asset, with repeated boom‑and‑bust cycles underscoring why it still fails to function as money.
• Crypto still doesn’t fulfil the core functions of money. Bitcoin is too volatile to store value, rarely used as a unit of account, and impractical as a medium of exchange.
• Stablecoins are emerging as crypto’s true “digital cash,” driven by price stability, global usability, and their central role in trading, payments, and liquidity.
• Rapid stablecoin adoption could reinforce the global role of the USD, with dollar‑linked digital tokens increasing international reliance on USD‑based settlement and potentially boosting structural demand for short‑dated US Treasuries thereby supporting the USD’s position as the world’s dominant reserve currency

Cryptocurrencies like Bitcoin remain more like speculative assets than money

The sell‑off in cryptocurrencies at the start of this year has drawn broader financial market attention. The price of Bitcoin fell to a low of USD 60,033 before rebounding to around USD 70,000. It is currently trading below the estimated mining cost of roughly USD 87,000, putting additional pressure on miners. After reaching a fresh record high of USD 126,251, Bitcoin has lost around 45% of its value over the past four months. The sell‑off has erased approximately USD 1.1 trillion from Bitcoin’s market capitalization, which now stands at around USD 1.37 trillion. By comparison, Bitcoin accounts for about 59% of the total cryptocurrency market capitalization of USD 2.34 trillion. The price action continues to demonstrate that Bitcoin remains highly volatile. Historically, there have been even larger declines. The most recent major downturn occurred in the year to November 2022, when Bitcoin lost around 75% of its value. It also fell by roughly 60% between June 2019 and March 2020, and by about 85% between December 2017 and December 2018. Such volatility reinforces why cryptocurrencies continue to be viewed as speculative digital assets rather than a stable digital form of money.

Cryptocurrencies still do not fully satisfy the three main functions of money

Cryptocurrencies, including Bitcoin, still do not fully satisfy the three main functions of money: i) medium of exchange, ii) unit of account, and iii) store of value. Bitcoin only partially functions as a medium of exchange. It is not widely accepted for everyday transactions, and even in places where it is accepted, slow transaction processing times and high network fees during periods of congestion make it less practical than traditional currencies. Many early Bitcoin‑friendly businesses such as Expedia and Steam have stopped accepting it due to volatility and operational complexity. Bitcoin can process only around seven transactions per second, which is significantly lower than the capacity of Visa (around 65,000 per second) and Mastercard (over 5,000 per second). Regulatory uncertainty also discourages broader merchant and payment‑provider adoption. As a result, Bitcoin lacks the network effects needed to function as a universal medium of exchange. Consequently, most Bitcoin holders do not use it for everyday transactions. Instead, Bitcoin and other cryptocurrencies are primarily held (“HODLed”) as speculative assets rather than as a functional digital form of money.

ANOTHER SHARP DROP IN THE VALUE OF BITCOIN

Source: Bloomberg, Macrobond & MUFG GMR

ROLE AS DIGITAL GOLD HAS BEEN CHALLENGED

Source: Bloomberg, Macrobond & MUFG GMR

Secondly, prices of goods and services are rarely denominated in Bitcoin. Even in places where Bitcoin is accepted, goods and services are still priced in fiat currency and then automatically converted into Bitcoin at the moment of purchase. Bitcoin’s extreme price volatility makes it unsuitable for pricing goods and services, maintaining financial accounts, recording debts, or comparing economic value across time and across markets. By contrast, an effective unit of account must be stable, widely recognised, predictable, and easy for people to understand and use. Bitcoin does not yet meet these criteria, which further limits its usefulness as a functional monetary unit.

Volatility of Bitcoin limits effectiveness as store of value & unit of account

Finally, Bitcoin’s extreme volatility also limits its effectiveness as a store of value. An asset functions as a reliable store of value if: i) its purchasing power does not fluctuate wildly, ii) the risk of permanent loss is low, iii) it can be easily converted into money without causing large price movements (high liquidity), iv) long‑term demand is stable, and v) its value is not heavily dependent on speculative behaviour. Bitcoin falls short on several of these criteria. Its value is driven largely by market sentiment, liquidity conditions, speculation, and shifting narrative cycles rather than stable, underlying economic fundamentals. Supporters often argue that Bitcoin resembles a digital form of gold because its maximum supply is capped at 21 million coins. An issuance limit that can only be changed with broad global consensus across the network. Current estimates suggest that 99% of all Bitcoin will have been mined by 2035. Additionally, a significant share, estimated between 3 million and 3.8 million coins, is believed to be permanently lost due to forgotten private keys, destroyed wallets, or dormant addresses.

Recent divergence in price of gold & Bitcoin is challenging perception it is a digital version of gold

Recent price action is challenging the perception that Bitcoin functions like a digital form of gold. While Bitcoin has lost around 45% of its value since October, the price of gold has risen by roughly 25%. The rise in gold and other precious metals may reflect renewed investor concerns about fiat‑currency debasement—concerns triggered by heightened US policy uncertainty at the start of this year, the persistently elevated US budget deficit, and inflation remaining above target. However, it is notable that Bitcoin has not benefited from this environment. The latest monthly flow data from the World Gold Council shows that a surge in inflows into gold ETFs has been a major driver of the metal’s strength at the beginning of the year. In January, gold ETFs attracted USD 19 billion in inflows, marking the strongest month on record. The combination of these net purchases and a 14% rise in the gold price pushed global gold ETF assets under management (AUM) to a new high of USD 669 billion. Demand for gold ETFs was led by North America and Asia. Monthly inflows from Asia reached a record level, while inflows in North America were the second highest on record. January also marked the eighth consecutive month of inflows from North America and the fifth consecutive month from Asia.

RECORD INFLOWS INTO GOLD ETFS

Source: World Gold Council

In contrast, central bank demand for gold has moderated alongside the sharp rise in the gold price, which has almost doubled in value since the end of 2024. According to the World Gold Council, central banks’ net gold purchases totalled a sizeable 863 tonnes in 2025, representing a step down from the average annual purchases of around 1,070 tonnes recorded over the previous three years. Nevertheless, purchases in 2025 remained significantly higher than the average annual total of roughly 470 tonnes seen between 2010 and 2021.

Bitcoin has reversed all of the gains recorded since President Trump became president & put in place crypto-friendly legislation

As a result of the sharp sell‑off in recent months, Bitcoin has now reversed all the gains recorded since President Trump won the election in early November 2024. Bitcoin and other cryptocurrencies had risen last year on optimism surrounding President Trump’s pro‑crypto policy agenda. During his first year in office, President Trump signed an executive order in March 2025 establishing a strategic Bitcoin Reserve. The order directs the US Treasury to treat Bitcoin as a form of strategic financial property, with initial capitalization sourced from Bitcoin seized or forfeited in criminal and civil cases. In addition, he signed an executive order in January 2025 promoting the “responsible growth and use of digital assets,” which prioritizes regulatory clarity for the crypto industry, protects banks’ ability to serve crypto‑related businesses, supports the development of USD‑backed stablecoins, and restricts federal agencies from issuing or promoting Central Bank Digital Currencies (CBDCs). CBDCs were cited as posing risks to privacy, undermining US sovereignty, and threatening financial system stability.

GENIUS Act & CLARITY Act helped to boost investor optimism for crypto currencies

Two major pieces of legislation were the GENIUS Act (Guiding and Establishing National Innovation for US Stablecoins Act) and the CLARITY Act (Digital Asset Market Clarity Act of 2025). The GENIUS Act was the first major federal crypto law enacted in the United States, focused specifically on creating a regulatory framework for payment stablecoins. Its objectives included strengthening the safety and legitimacy of stablecoins, promoting the competitiveness of USD‑backed stablecoins, and ensuring they are fully compatible with the banking system. Under the Act, stablecoin issuers are required to hold high‑quality reserves, maintain 1:1 backing at all times, and undergo regular audits and disclosures to enhance transparency and trust. The CLARITY Act legally defines digital assets and assigns regulatory responsibility based on their economic function. Under this framework, the SEC is responsible for digital assets that function as securities (such as investment contracts and token‑based capital raises), while the CFTC oversees digital commodities, including assets such as Bitcoin.

Stablecoin growth is attracting more market attention as digital form of cash            

Unlike other crypto currencies like Bitcoin, stablecoins are designed to maintain a stable value

Stablecoins are digital tokens designed to maintain a stable value, typically pegged 1:1 to: i) the USD (e.g., USDC and USDT), ii) major fiat currencies such as the euro or the pound, or iii) commodities such as gold (in the case of gold‑backed stablecoins). Their purpose is to function like digital cash, avoiding the extreme price volatility associated with Bitcoin and other cryptocurrencies. Around 80% of all trades executed globally on centralized crypto platforms involve stablecoins, underscoring their essential role in the functioning of the broader crypto‑asset ecosystem. USDT (Tether) is the largest and oldest stablecoin, issued by Tether, and it dominates global crypto liquidity particularly in Asia, Latin America and various emerging markets. It is pegged 1:1 to the USD and backed by a mix of assets, including cash, predominantly US Treasury bills, secured loans, and other investments. USDT is widely used for USD‑based savings in emerging markets, cross‑border remittances, DeFi applications, and as a major source of liquidity across crypto markets. It often represents more than 70% of stablecoin trading volumes. Stablecoins have gained popularity because they combine several attractive features: i) price stability, ii) crypto‑native speed and interoperability, iii) fast cross‑border settlement, iv) low transaction fees, and v) 24/7 availability. In practice, they operate as digital dollars within the crypto ecosystem.

USD-LINKED STABLECOINS DOMINATE

Source: Bloomberg, Macrobond & MUFG GMR

STABLECOINS HAVE DEVIATED BRIEFLY FROM PEGS

Source: Bloomberg, Macrobond & MUFG GMR

Stablecoin market is expected to continue rapid growth

The global stablecoins market surpassed a total market capitalisation of approximately USD 310 billion early this year, driven by rising adoption for trading, decentralised finance (DeFi), and cross‑border payments. Nearly 99% of the market is dominated by USD‑pegged assets. USDT’s market capitalisation stands at around USD 184 billion, while USDC’s totals roughly USD 74 billion. When compared with the overall cryptocurrency market capitalisation, stablecoins account for about 13% of the total. A share that is expected to increase over the coming decade. Following several years of rapid expansion, it has encouraged estimates suggesting that the stablecoin market could even grow to between USD 2–4 trillion by 2030.

Stablecoins are better positioned to satisfy three main functions of money

Unlike other cryptocurrencies such as Bitcoin, stablecoins are better positioned to satisfy the three main functions of money. Firstly, merchants and users are more willing to accept stablecoins as a medium of exchange because their value remains close to 1 USD/GBP/EUR. This reduces the risk that the asset loses value during the transaction window. Stablecoins also enable rapid global payments that can settle within seconds or minutes and operates 24/7. The fees attached to these payments are often lower than those charged by banks or card networks, making stablecoins useful for cross‑border transfers, remittances, and on‑chain trading. They are already arguably the strongest medium of exchange among all crypto assets within digital environments, where they are used as trading pairs on crypto exchanges, as collateral in lending platforms, and as a means of payment. Stablecoins could also be more attractive as a medium of exchange in countries experiencing high inflation.

Credibility of stablecoin pegs are important

Secondly, stablecoins are pegged to fiat currencies, making them a more predictable unit of account. In crypto markets, assets are often quoted in USDT or USDC terms, borrowing and lending rates are displayed in stablecoin units, and trading portfolios are typically valued in stablecoin equivalents. As a result, stablecoins have become the de facto unit of account within the blockchain economy. One area of concern as unit of account is the reliability of a stablecoin’s peg. It depends entirely on the issuer or the mechanism backing it placing the focus on the quality and accessibility of reserves or collateral. The stability of stablecoin pegs can vary significantly across different models. USDT (Tether) and USDC (Circle) generally maintain the strongest and most reliable USD‑pegs. Brief de‑pegs have occurred, for example during the 2023 US regional banking crisis when USDC’s reserves were temporarily affected, but they quickly regained their pegs. The risk of a permanent de‑peg is considered low but not zero. A severe failure in reserves, governance, or regulatory compliance could undermine confidence in fiat‑backed stablecoins, particularly if the assets backing the peg were to become impaired or inaccessible.

STBALECOINS MAINLY BACKED BY US TREASURIES

Source: IMF “How stablecoins can improve payments & global finance” - Dec 2025

Stablecoins could become more important source of structural demand for US government debt

USDT (Tether) is backed by a diversified portfolio of reserves dominated by US Treasury bills, gold, Bitcoin, and other liquid assets. According to the latest Financial Figures and Reserves Report prepared by BDO, Tether’s direct holdings of US Treasury bills climbed above USD 122 billion by the end of last year.  Approximately three quarters of its reserves are held in cash, cash equivalents, and US Treasuries, reflecting a deliberate shift toward highly liquid and low‑risk assets as global demand for its dollar‑pegged token continues to grow. Over the past year, Tether has issued about USD 50 billion in new USDT, further increasing its need for safe collateral.  This scale of Treasury exposure already places Tether among the largest private holders of US government debt, although it still represents only a small fraction of the USD 30 trillion in marketable US Treasuries outstanding. If the stablecoin market continues to expand at its current pace, demand from issuers such as Tether could help absorb a growing share of short‑term US government debt issuance. In turn, this may incentivize the US Treasury to issue more short‑dated securities to meet funding needs. More broadly, if tokenised USDs gain widespread global adoption, stablecoins could become a structural source of demand for US government financing, and potentially influence debt‑issuance strategy and broader global liquidity dynamics.

Stablecoins to help USD remain dominant global reserve currency?

US Treasury Secretary Scott Bessent has argued that stablecoins could help ensure the USD remains the dominant global reserve currency. By contrast, senior ECB officials have warned that the rapid growth of USD‑pegged stablecoins could undermine Europe’s efforts to strengthen the EUR’s international role. In the UK, the government has launched a consultation on expanding and deepening the Treasury‑bill market in anticipation that GBP‑stablecoin issuers could become significant new buyers. At present, the relatively small size of the UK T‑bill market is a structural constraint on the growth of GBP‑denominated stablecoins.

But could threaten sources of US bank funding posing financial stability risk.

On the other hand, Federal Reserve analysis has highlighted several potential risks. Stablecoins could reduce or reshape US bank deposits if households and firms increasingly substitute bank deposits for stablecoins. A decline in deposits would reduce banks’ access to low‑cost funding, potentially forcing them to rely more heavily on more expensive or volatile alternative funding sources. In addition, the 24/7 settlement capability of stablecoins and their programmable payment features could erode bank fee income and reduce transaction‑deposit balances. These dynamics could create meaningful disruption if stablecoin adoption accelerates. However, Federal Reserve Governor Stephen Miran has noted that stablecoins cannot pay interest under the GENIUS Act, removing a key incentive for depositors to shift funds out of interest‑bearing bank accounts. He also emphasises that stablecoins are not FDIC‑insured, making them less appealing as a replacement for insured deposits. In his view, depositors are unlikely to broadly substitute insured bank deposits with uninsured stablecoins.