Liquidity Assessment through Asset-Backed Tokens: An Examination of Velocity
## High Velocity of Stablecoins: Tether as a Case Study
In the rapidly evolving world of cryptocurrencies, stablecoins, such as Tether (USDT), have emerged as a notable exception in terms of liquidity. These asset-backed tokens exhibit much higher velocities than traditional securities and even leading cryptocurrencies like Bitcoin and Ethereum.
### Understanding Token Velocity
Token velocity, a key measure of liquidity, is calculated by dividing the total transaction volume by the average market cap. High velocity signifies that each token is frequently used in transactions, rather than being held as a long-term store of value.
### The Driving Factors Behind Stablecoin Velocity
- **Transactional Focus:** Stablecoins like USDT are designed primarily to facilitate fast, low-friction payments and trades across crypto exchanges and DeFi platforms. Their value is pegged to a fiat currency, minimising volatility and making them ideal for real-time settlement. - **Continuous Circulation:** Unlike Bitcoin or traditional securities, stablecoins are rarely held long-term. Instead, they are constantly in motion—used for trading, arbitrage, moving funds between exchanges, and as collateral in DeFi protocols. - **Ecosystem Role:** The crypto ecosystem relies on stablecoins for liquidity, margin trading, and as a bridge between fiat and crypto. Their high velocity is a direct function of their role as the primary medium of exchange within the digital asset space. - **Market Cap vs. Transaction Volume:** Stablecoins often have a relatively small market capitalization compared to their massive transaction volumes. For example, USDT might have a market cap of $85 billion but $1 trillion in monthly transaction volume, yielding a velocity around 12—far higher than Bitcoin (~0.75) or Ethereum (~1.4).
### Comparison to Traditional Securities and Cryptocurrencies
| Asset Type | Typical Velocity | Primary Use Case | Reason for Velocity Level | |----------------------|------------------|-------------------------------|--------------------------------------| | Tether (USDT) | ~12[1] | Payments, trading, DeFi | Built for constant circulation | | Bitcoin (BTC) | ~0.75[1] | Store of value, investment | Held long-term, less transactional | | Ethereum (ETH) | ~1.4[1] | Payments, DeFi, smart contracts| Mixed utility and store of value | | Traditional Securities| Very low | Investment, dividends | Rarely traded, held for return |
- **Traditional Securities:** These are bought primarily for investment returns (dividends, interest, capital gains) and are infrequently traded, leading to very low velocity. - **Cryptocurrencies:** While Bitcoin and Ethereum see some transactional use, their primary value proposition as stores of value or platforms for decentralized applications means they are often held, not rapidly circulated. - **Stablecoins:** Their entire raison d’être is to be a transactional medium—stable, liquid, and always in demand for moving value quickly across the crypto ecosystem. This purpose, combined with their design, ensures exceptionally high velocity.
### Technology and Infrastructure
Advancements in blockchain infrastructure—such as faster consensus mechanisms, Layer 2 scaling, and improved wallets—have further enabled stablecoins to be used for real-time, high-volume payments, reinforcing their high velocity.
## Conclusion
The high velocity of stablecoins like Tether is a direct result of their transactional focus within the crypto economy. Their stability, liquidity, and integration into trading and DeFi systems ensure they are constantly in motion, unlike traditional securities (held for investment) or top cryptocurrencies (held for value preservation). This fundamental difference in use case and design is the primary driver behind their exceptional velocity.
It is worth noting that the velocity of U.S. Dollar cash (US Dollar M1 money supply) is 6.2%, while the S&P 500 and FAANGS stocks have velocities of 6.3% and 0.6% respectively. Hyper trading activity in Asset-Backed Tokens indicates a high demand for Stable Coins. The liquidity of Asset-Backed Tokens is much higher than other cryptocurrencies, making them a notable exception in the crypto markets.
There is less incentive to hold Asset-Backed Tokens for the long term due to limited gains from appreciation in prices. Ture USD, another Asset-Backed Token, has a velocity of 19%, while HelloGold and LAToken have velocities of 9% each. The correlation between liquidity and volatility in the crypto markets is high, with lower liquidity leading to higher volatility. Stable Coins offer a secure haven in the otherwise volatile and risky crypto market.
Bitcoin has the highest velocity among cryptocurrencies at about 4.1%, while Ethereum is close behind with a velocity of 3.6%. The largest Asset-Backed Token, US Dollar-backed Tether, has a velocity of over 100%, meaning every Tether token gets traded every day. Asset-Backed Tokens have significantly higher liquidity compared to other cryptocurrencies and traditional securities.
Institutional investors are increasingly showing interest in the high velocity and stable nature of stablecoins, such as Tether, for finance-related activities like investing due to their rapid circulation. The technology underlying stablecoins, including advancements in blockchain infrastructure, facilitates high-volume, real-time transactions, further appealing to institutional investors seeking to capitalize on the liquidity and low volatility associated with stablecoins.
