Strategizing from within, winning from a thousand miles away. Hello everyone, I am Lin Chao, a global financial market observer, focusing on cryptocurrency market analysis, bringing you the most in-depth trading information analysis and technical teaching.

I believe everyone has seen quite a few articles about stablecoins in the market, but none of them can fully explain its logic and development from beginning to end. Today, Lin Chao will clarify what stablecoins are in a lengthy article, and once you understand it, you will grasp the fundamental logic behind the recent rise in the cryptocurrency market.

Looking back at Bitcoin's performance over the past decade, you will find that although it has skyrocketed dozens of times, the process has been extremely tumultuous. It has experienced multiple surges of over ten times, as well as several drops of more than 80%. Even if someone was optimistic about Bitcoin's prospects ten years ago, they could easily get trapped at high prices and face significant pullbacks. How many people can truly withstand such volatility and hold onto Bitcoin for over a decade? Therefore, even when seeing a great opportunity, it is not easy to truly seize it.

However, if one could gain an early understanding of a vague price pattern, such as when prices are most likely to break through or when a crash is most probable, wouldn't it be relatively easier to grasp early investment opportunities in this development? Today, Lin Chao will help investors find this pattern in stablecoins. Of course, as a long-term value investor, I will not look for patterns in stock candlestick charts but will help everyone find answers from various fundamental perspectives, such as the technical characteristics of stablecoins, their business models, and the macro environment.

What are stablecoins? Stablecoins are a type of cryptocurrency that, like all cryptocurrencies, utilizes blockchain technology and has characteristics such as anti-counterfeiting, traceability, and non-replicability. However, unlike volatile digital currencies like Bitcoin and Ethereum, stablecoins are a type of cryptocurrency that is pegged to real fiat currencies, most commonly tied to the US dollar, with the value of one stablecoin consistently corresponding to one dollar. To achieve this effect, each stablecoin is generally backed by an asset worth one dollar as collateral. This collateral is often cash or risk-free short-term government bonds. This is completely different from Bitcoin, which is algorithm-based and has no underlying asset support.

The reason stablecoins have become a hot topic in the market is due to their extremely high ceiling. In this regard, they are on par with or even surpass Bitcoin from back in the day. So where does this ceiling come from? The most important core point is that as a currency, stablecoins have an unparalleled relative advantage. For example, compared to the US dollar, stablecoins have lower transaction costs, faster speeds, and also possess the advantages of blockchain technology such as anti-counterfeiting, traceability, and non-replicability. Compared to Bitcoin, which is a continuously appreciating currency, people are more inclined to hold onto it as an asset rather than use it for transactions; whereas stablecoins excel in stability, making them ideal as a medium of exchange. Therefore, theoretically, stablecoins are more suitable for transactions than both the US dollar and Bitcoin, and they seem capable of handling all transaction scenarios, even having the potential to replace the US dollar as the global trade currency. This is the main reason many people are enthusiastic about stablecoins.

However, as investors, one should not be swayed by these overly optimistic statements. Stablecoins do have advantages in terms of their currency attributes compared to the US dollar and Bitcoin. However, when it comes to real-world applications, the scenarios for stablecoin use are actually very specific. This is crucial; only by understanding their true application scenarios can one grasp the key to their future value breakthroughs. Nowadays, when people talk about the application scenarios of stablecoins, they often mention black market transactions, cryptocurrency trading, or as a value-preserving option in high-inflation countries, etc. But in reality, if one values the investment potential of stablecoins, these scenarios are not the focus. For investors, the most critical use case for stablecoins, which also determines their investment value, is simply this: cross-border payments.

Currently, we use the US dollar's SWIFT system for cross-border payments. This is a system that has been around for decades and has many issues. To transfer money, it must go through the remitting bank, an intermediary bank, and then the receiving bank, with each layer incurring a fee, which can add up to costs as high as 1% to 10%, and the speed is very slow, often taking several business days to arrive. I believe many investors have experience with remitting money overseas, and how inconvenient that can be is something everyone can relate to. Stablecoins, on the other hand, are based on blockchain technology, which eliminates intermediaries and enables peer-to-peer transfers. Typically, a cross-border payment of tens to hundreds of dollars incurs only a few cents in fees with stablecoins, far lower than SWIFT transfers, and can be confirmed and received in just seconds, available 24/7, unlike banks that require waiting for business days to process transfers. It has incomparable advantages over traditional cross-border payments.

Do not think that stablecoin cross-border payments are just simple bank transfers; they involve massive international trade. Any payment between international trades requires cross-border remittance. This is a market worth $200 trillion, with enormous potential. Moreover, this is just the static market size. If viewed dynamically, the entire cross-border payment market is likely to expand further due to stablecoins. Why do I say this? In the past, a small export order worth a few hundred dollars processed through the SWIFT payment system would have fees eating up nearly 10%. As a result, many small and medium-sized enterprises, such as small coffee farms in Jamaica or small garment factories in Southeast Asia, were essentially excluded from global trade. They often had to sell domestically or rely on intermediaries to guarantee cross-border transactions. Now, with stablecoins entering the cross-border payment market, the barriers for thousands of small and medium-sized enterprises to engage in cross-border business have significantly lowered. They can transact directly with overseas buyers at extremely low costs, bypassing traditional intermediaries and participating in global trade. This will greatly enhance the overall scale of cross-border transactions.

Thus, not only do stablecoins have a higher advantage compared to traditional cross-border payments and are expected to capture a share of the market, but their emergence also allows enterprises that previously did not participate in cross-border trade to join in, creating a positive cycle. This is where stablecoins can truly bring disruptive value. It is not merely about improving payment efficiency; it fundamentally drives the scale of global trade.

Because of its ability to rewrite the global payment and trade landscape, the market potential of stablecoins is widely recognized. Although the total market capitalization of stablecoins is currently only about $250 billion, according to Bain's prediction, the total size of the stablecoin market will reach $4 trillion by 2030, equivalent to an annual growth rate of 70%. Recently, a joint report by the US government and Standard Chartered Bank also stated that the total size of the stablecoin market will reach $2 trillion by 2028, also around 70% growth.

So, since the ceiling of this industry is so high, should one start laying the groundwork early? Understanding that there is a ceiling is not enough; investors must also understand the investment logic of the industry. Regarding this, Lin Chao has found that most investors have a significant misconception. Many believe that stablecoins will grow wildly in speculation like early Bitcoin. However, in reality, the investment logic of stablecoins is completely different from that of Bitcoin, and its growth is much harder to achieve.

Bitcoin is more like an asset; its investment logic relies on continuous trading to drive price increases, which is relatively easy. Stablecoins, on the other hand, are pegged to one dollar and do not fluctuate. Essentially, they are more like a commodity; their value does not come from asset appreciation but from increased usage. Just like the value of the US dollar does not lie in the dollar itself but in how many people use it for transactions. Stablecoins are the same; they need real individuals to participate in their use to enhance their value. This difficulty is evidently higher and cannot be achieved through mere speculation in the capital market.

Having understood the investment logic of stablecoins, the most important question arises: since usage is the key to stablecoins, why have they not been widely adopted after more than a decade of development? What are the reasons constraining their development? Are there any solutions? The answers to these questions are crucial because they determine when stablecoins can truly break through and when they will encounter obstacles, and the true rules of stock prices are hidden behind these questions.

First, stablecoins face a fundamental issue: the market lacks basic trust in them. The stablecoin industry still has many irregularities. For example, many companies claim to be stablecoins but have no assets backing them. Even the largest player in the industry, Tether's USDT, has 15% of its assets not placed in risk-free assets, raising doubts about its stability and redemption capability. If users of a currency worry about not being able to redeem it or fear the risk of platform collapse, then no matter how advanced the technology or how many advantages it has, it is difficult for that currency to become mainstream.

Is there a solution? Yes. The best solution is regulation. In fact, early Bitcoin faced the same problem. Due to the decentralized nature of blockchain technology, the industry has always struggled to obtain effective regulation, leading to numerous collapse events. Two years ago, the bankruptcy of Three Arrows Capital and the FTX exchange scandal are still fresh in memory. However, in the past two years, with targeted regulatory measures, the industry has begun to achieve preliminary normalization, allowing traditional Wall Street institutions to enter the market. Only then did Bitcoin's price stabilize and experience the largest scale of development in the industry's history. This is fundamentally because the entry of regulation strengthened people's trust in Bitcoin, ultimately leading to an increase in Bitcoin's value.

The same applies to stablecoins. For the stablecoin industry to develop, regulation is crucial. Recently, the stablecoin industry has just experienced a milestone shift: the passage of the US Genius Act. This legislation has been in progress for several months and was officially signed by Trump on the 19th.

The Genius Act can be summarized in four points: First, it guarantees that 100% of the value behind stablecoins has real collateral and only allows investment in very short-term US Treasury bonds; second, it significantly increases the transparency of stablecoin issuers for regulatory agencies and the public to supervise; third, it requires that stablecoins cannot pay interest. This is to ensure the currency attributes of stablecoins, preventing them from becoming investment products or financing tools; fourth, it strengthens the anti-money laundering and compliance obligations of issuing institutions to curb illegal transactions.

The passage of this Genius Act means that stablecoins now have a basic regulatory framework and development direction, which is the foundation for gaining trust and the key to long-term growth. This is the fundamental reason why the stablecoin industry has suddenly become popular recently. Many people think the surge in stablecoins is due to Circle's IPO plan, but in fact, the root cause is the introduction of this Genius Act; Circle is merely riding the wave to go public.

Now that regulation is so critical, will the industry enter a rapid development phase after the Genius Act? Many interpretations in the market believe so, but Lin Chao does not think so. The nature of stablecoins makes it difficult for the growth momentum brought by regulation to be sustained. Stablecoins will soon encounter the next layer of obstacles.

Why do I say this? As analyzed above, the investment logic of stablecoins is different from that of Bitcoin. Stablecoins do not grow through asset appreciation but through increased usage. For assets, once trust is established, prices can continuously rise. The improvement of regulation indeed became the most critical turning point for Bitcoin's value. However, for stablecoins, which have commodity-like attributes, trust alone is not enough for growth; they must also be user-friendly. Currently, stablecoins are far from being user-friendly.

For ordinary people wanting to make stablecoin transfers, the current process is very cumbersome. If one is not familiar with digital currencies, many tools are unknown and their purposes unclear. Moreover, if there is an operational error, the consequences can be severe; for example, forgetting a key means that funds are completely unrecoverable. Even if these difficulties can be overcome, if the other party does not have a stablecoin wallet or exchange account, the transaction cannot be completed. So, insisting on usage while requiring the payee to also use it cannot drive industry development either. Additionally, the current technology of stablecoins is inadequate. While stablecoin transaction volumes are low, transfers are cheap and fast. However, once transaction volumes increase, the system will become congested. To make a transaction, one may have to queue, and the time could even be longer than SWIFT. This is a natural flaw of blockchain technology, and there is currently no good way to completely resolve it.

Thus, stablecoins are not only cumbersome to use, but the technology itself also has bottlenecks. It is important to know that the most crucial property of a payment medium is the network effect. There must be enough use cases and enough people willing to use it, which in turn encourages merchants to accept it, thereby promoting more usage. However, if transactions are so complex and the technology has flaws, it is impossible to establish a network effect. Stablecoins are destined to be used only as niche currencies among specific groups.

So, is there no solution to this problem? In fact, technical issues are relatively easier to solve. There are already methods such as sharding technology or off-chain scaling that can alleviate blockchain congestion to some extent. However, the key is to build infrastructure that has network effects. This means getting companies that possess network effects to be willing to engage with stablecoins. For example, payment companies like PayPal, credit card companies like Visa/Mastercard, or major global banks. These companies have payment licenses, complete compliance regulations, and inherently possess network effects. Getting these companies to participate and build the infrastructure for stablecoins will allow users to easily transfer stablecoins and exchange them with sovereign currencies. Only then can stablecoins truly possess usability and achieve increased usage.

If you follow stablecoin news, you will understand that the aforementioned large payment companies, including some major banks, have begun to enter the stablecoin space. Does this mean that the second wave of growth for stablecoins is imminent? Not at all. Do not be misled by the superficial actions of these large companies. While they seem to be laying out stablecoin strategies, in reality, they are merely testing the waters, and no one is genuinely serious about building the infrastructure for stablecoins. This is not a subjective assumption, but rather a consequence of the underlying interests.

These financial and payment giants are already vested interests in the existing payment system, and stablecoins are bound to impact their interests. Once stablecoins become widespread, remittances will no longer go through their traditional clearing networks, and high transfer fees will no longer be necessary, which would undermine their most profitable business. For instance, cross-border payment revenue accounts for one-third of Visa and Mastercard's total revenue, making it very difficult for them to willingly relinquish this income. Therefore, even if large companies recognize the trend of stablecoins, it is hard for them to decisively disrupt their own business.

Could there be new disruptors, such as stablecoin issuers like Circle, challenging these giants? That is also difficult. They lack payment licenses and cross-border transaction channels, making it impossible to build infrastructure with network effects. The keys to these channels are controlled by regulators. Regulatory agencies prioritize risk control and are unlikely to easily grant channel licenses to unverified challengers.

This creates a classic triangular dilemma: banks and established payment institutions have resources and licenses, but they are vested interests with no motivation to disrupt the existing system; innovators like Circle have ideas and technology that could best promote the adoption of stablecoins, but they lack licenses and thus do not have cross-border transaction channels; regulators have the power to issue licenses but, due to risk control principles, prefer to grant licenses to established institutions that have been compliant for decades, hoping they will facilitate the development of stablecoins. Thus, the three parties mutually restrain and impede each other: the old players do not want to change, the new players cannot push forward, and regulators dare not let go. As a result, although stablecoins technically have the capability to change cross-border payments and are seen as a future trend, there is actually no one with the ability to stand up and drive this disruptive trend. If this situation continues, the development of stablecoin cross-border payments is unlikely to be rapid, and the current excitement is destined to be fleeting.

So does this mean that stablecoins have no future opportunities? It can only be said that change will be very difficult. Boldly speculating, changes may come from two aspects: first, a powerful political figure pushes for regulatory reform without regard for consequences, thereby breaking the triangular dilemma through a breakthrough. However, this is hard to achieve in democratic countries. Second, and more likely to be realized, is that stablecoins actively integrate into the existing SWIFT system. The current SWIFT system is deeply linked with the regulatory systems of various countries, anti-money laundering mechanisms, and capital controls. There are thousands of banks worldwide connected to this system, and it has become part of the modern international financial order. Completely overturning it is nearly impossible. For stablecoins to enter the cross-border payment industry, they must actively integrate into the SWIFT system rather than seek to disrupt it. This requires large financial institutions to sacrifice a portion of their income, stablecoin issuers to compromise some of their decentralized nature, and regulators to embrace some risks. Each party must sacrifice, but less than before. The hope is to break the triangular dilemma through this approach. If investors see breakthroughs in the above two directions, then the true period of rapid growth for stablecoins will officially arrive. Otherwise, even with improved regulation, stablecoins are destined to remain niche currencies, and their excitement will inevitably come to an end.

At this point, I have analyzed the development of the stablecoin industry at various stages. If you can read this far, you should have a very clear logic regarding stablecoins. So how should investors view stablecoins as an investment opportunity?

First, it must be acknowledged that the passage of the Genius Act is indeed a watershed moment for stablecoins, providing the most basic conditions for growth and likely bringing a certain explosion to the industry in the short term. However, regulation can only ensure that stablecoins do not encounter problems, and to realize the ceiling of stablecoins, they must truly be user-friendly. Currently, it seems that for stablecoins to be user-friendly, or to establish effective network effects, they still face the difficult-to-break triangular dilemma. This means that this wave of growth is destined to be unsustainable. If one wants to participate in this trend, it may be necessary to take profits when they are good. In the cryptocurrency market, a long-term bull market is bound to begin, as I have repeatedly mentioned in previous writings. The fundamental logic is the increase in liquidity and overall cryptocurrency market capitalization, which are necessary conditions for an upward trend.

However, these are ultimately short-term investment thoughts. If we broaden our perspective, I personally highly recognize the ultimate ceiling of stablecoins. In my view, stablecoins are an inevitable result of technological progress in payment systems; technological advancement will not shift due to human will or objective difficulties. I believe that all the difficulties mentioned above will eventually be resolved. However, for investors, one cannot decide to invest now solely based on the ultimate ceiling. The development process is also crucial. Now that we understand several key nodes in the development of stablecoins, I believe you can confidently seize this disruptive investment opportunity.

The success of investing depends not only on choosing good targets but also on when to buy and sell. Preserving capital and making good asset allocations are essential for steady progress in the ocean of investments. Life is like a long river flowing into the sea; what determines victory or defeat is never the gains and losses of a single pass or the profits and losses of a moment, but rather a well-thought-out strategy followed by action, knowing when to stop and when to gain.

The global market is ever-changing, and the world is a whole. Follow Lin Chao to gain a top-tier global financial perspective.

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