Binance stablecoin BUSD sees a sharp market cap drop amid solvency and mismanagement worries

Stablecoins in the cryptocurrency market help provide U.S. dollar-pegged tokens within the volatile industry. In bull markets, the market capitalization of stablecoins tends to decrease as investors flock to more volatile assets; and in bear markets, investors seek shelter in low-volatility stablecoins, thus increasing their market caps.

On Jan. 26, the total market capitalization for stablecoins like Tether (USDT), USD Coin (USDC), Binance USD (BUSD) and Dai (DAI) is over $131 billion.

Stablecoin supply dominance. Source: Glassnode

Stablecoins are so crucial to the future of crypto that Moody’s, a well-respected analytics agency, is planning to develop a scoring system, which may help reduce the speculation and fear that some investors have with stablecoins.

Such fear amid a lack of stablecoin transparency has led one of the top stablecoins, BUSD, to see a major usage decline in recent weeks.

Let’s examine the factors affecting the BUSD stablecoin.

BUSD’s market cap takes a major hit

While the BUSD market cap witnessed a large bump on Sept. 30, 2022, those gains came from Binance’s decision to forcefully swap the exchange’s USDC holders to its own stablecoin. Those gains have since evaporated. At the time, the automatic conversions took $3 billion off of USDC’s market cap.

BUSD’s market cap has continued to fall due to problems with the dollar-pegged tokens’ management that first came to light in January 2023. While Binance pushed back on reports that the stablecoin was not fully backed, investor fears led to a major exodus.

According to blockchain analytics provider Nansen, the circulating supply of BUSD decreased to $15.4 billion on Jan. 25. The drop represents a decrease of $1 billion from the previous week and $2 billion compared with December 2022.

Stablecoin market caps. Source: Nansen

The most recent decline sped up BUSD’s market cap decrease from $22 billion when worried investors rushed to withdraw money from Binance after it misrepresented the amount of digital assets in its collateral reserves by combining corporate holdings on reports.