The impact of a strong dollar on cryptocurrencies and the role of stablecoins

Author: Pundi X

Compiled by: ChainCatcher

Due to the Federal Reserve's tough monetary stance in the face of soaring inflation, the dollar is stronger than it has been in decades. Unfortunately, the side effect of a stronger dollar is the increasing devaluation of other world currencies. The exchange rates of currencies like the euro, yen, and pound against the dollar have fallen to their lowest levels in years.

Given the clear impact of a stronger dollar on other fiat currencies, it raises the question of what will happen to cryptocurrencies. Will the devaluation of fiat currencies prompt people to invest in Bitcoin and Ethereum? Or will it lead people to convert all their money into dollars?

The first sign that people are not viewing cryptocurrencies as a hedge against inflation is that their performance has not been very good. While the dollar has surged about 20% to reach a 20-year high, the value of Bitcoin has plummeted by 58%. Additionally, the CoinDesk Smart Contract Platform Index, which includes Ethereum (ETH), Cardano's ADA, and Solana's SOL, has dropped by 19.8%.

The fact that the value of cryptocurrencies has fallen alongside other fiat currencies has led people to believe that cryptocurrencies are a good hedge against inflation.

However, the downward performance of cryptocurrencies has not raised concerns among their most ardent supporters.

First, others point out that cryptocurrencies are still a relatively new asset class, and their performance is influenced by many other factors beyond the strength of the dollar. For instance, the value of Bitcoin fluctuates regardless of whether legislation is passed by governments around the world. Ethereum has recently been affected by its recent events, which have also changed its consensus protocol.

Not all digital assets are experiencing declines. A notable exception to this phenomenon is dollar-backed, regulated stablecoins like USDC and BUSD. Since each unit of these stablecoins is backed by actual dollars (maintaining a 1-1 peg), their performance has also been relatively good. The rise of stablecoins mirrors that of the dollar.

Stablecoins have even made digital dollars more accessible in parts of the world where high inflation and unmet dollar demand exist, further helping to maintain the strength of the dollar. With stablecoins, people in high-inflation areas can choose to hold assets backed by the world's strongest currency.

Overall, the performance of cryptocurrencies as a whole against the dollar has not been as good as many had hoped. However, this is far from a reason for panic—many factors can explain the decline in the value of tokens like Bitcoin and Ethereum, ranging from regulations to changes in consensus mechanisms.

The good news is that those who wish to see stronger cryptocurrencies can easily turn to dollar-backed stablecoins. Holding these stablecoins is as easy as holding other cryptocurrencies. For example, many exchanges ensure that BUSD, USDT, USDC, or Dai can be traded alongside top tokens like Bitcoin and Ethereum. Even startups like Pundi X ensure that their crypto-based point-of-sale machines (called XPOS) support stablecoins.

Because stablecoins are now easily accessible, whether through exchanges or innovations like XPOS, people are less likely to completely abandon cryptocurrencies. The tokens people choose to hold may differ, but it remains a relevant market.