Stablecoin: A Story of (In)Stabilities and Co-Movements Written Through Wavelet

Abstract

Stablecoins are crypto assets designed to maintain stable value by bridging fiat currencies and volatile crypto assets. Our study extends previous research by analyzing the instability and co-movement of major stablecoins (USDT, USDC, DAI, and TUSD) during significant economic events such as the COVID-19 pandemic and the collapses of Iron Finance, Terra-Luna, FTX, and Silicon Valley Bank (SVB). We investigated the temporal volatility and dynamic connections between stablecoins using wavelet techniques. Our results showed that the announcement of USDT’s listing on Coinbase in April 2021 significantly impacted the stability of stablecoins, evidenced by a decline in the power spectrum. This phenomenon has not been explored in the literature. Furthermore, the collapse of SVB was highly relevant to the stablecoin market. We observed high coherence between pairs during the pandemic, the Coinbase listing, and the collapse of SVB. After the collapse of Terra-Luna, USDT, USDC, and DAI became more connected in the medium term, with USDC and DAI extending in the long term despite a negative co-movement between USDT and the others. This study highlights the impact of exchange listings on the volatility of stablecoins, with implications for investors, regulators, and the cryptocurrency community, especially regarding the stability and safe integration of these assets into the financial system.