Liquidity Assessment Through Asset-Backed Digital Tokens: Focusing on Velocity as a Key Indicator
In the dynamic world of cryptocurrencies, asset-backed tokens like Tether are standing out for their exceptional liquidity. These tokens, which function as stable, highly liquid mediums of exchange, are significantly more active in trading than traditional securities and many top cryptocurrencies.
The reason for this heightened velocity can be traced back to several key factors. Firstly, stablecoins such as Tether are widely used as primary settlement currencies across most cryptocurrency trading, lending, and yield farming platforms. This continuous, high-volume demand for trading activity creates a dynamic and fast-paced market environment.
Secondly, asset-backed tokens settle transactions almost instantly on blockchain networks, reducing counterparty risk and cutting administrative overhead. Unlike traditional securities, which typically settle trades in T+2 days, this efficiency enables faster trading cycles and more dynamic market activity.
Thirdly, the divisible nature of asset-backed tokens allows for fractional ownership, lowering investment thresholds and enabling broader participation. This increased accessibility, combined with the 24/7 market availability of tokenized assets, further boosts trading frequency and liquidity.
Moreover, many platforms offering tokenized stocks or stablecoins provide zero or minimal commission trading and use smart contracts to automate settlement and custody processes. This streamlined approach removes friction that typically slows trading in traditional securities.
Some tokenized stocks even enable leveraged trading, attracting more speculative and momentum-driven trades, thereby increasing velocity.
In contrast, traditional securities are limited by slower settlement processes, longer market hours, higher fees, and more regulatory friction, leading to lower velocity. Top cryptocurrencies other than stablecoins may also have lower velocity due to their volatility and limited use as stable mediums of exchange.
This high trading activity in asset-backed tokens, often referred to as "Stable Coins," indicates a significant demand for these digital assets. Notably, the largest asset-backed token, US Dollar-backed Tether, has a velocity over 100%, meaning every Tether token gets traded every day.
Interestingly, the crypto markets, despite being smaller than traditional markets, are showing similar liquidity characteristics. For instance, Ture USD, another asset-backed token, has a velocity of 19%, while HelloGold and LAToken have velocities of 9% each. In comparison, the velocity of U.S. Dollar cash (US Dollar M1 money supply) is 6.2%, while the S&P 500 has a velocity of 6.3%. FAANGS stocks have a velocity of 0.6%.
In conclusion, asset-backed tokens like Tether are leading the way in terms of liquidity in the crypto markets. Their stability, efficiency, and accessibility make them a secure haven in the otherwise volatile and risky crypto market.
Note: The views expressed in this article are personal and do not necessarily reflect the views of AlphaWeek or The Sortino Group. Reproduction, storage, or transmission of this publication is allowed only under specific conditions or with written permission from the publisher. All rights for this publication are reserved by The Sortino Group.
[1] Hogi Hyun, Director at D1 Mint. [2] Data sourced from various industry reports and studies. [3] This article is a guest article for Hedge Funds, published by The Sortino Group. [4] Arbitrage players in the crypto markets are active in trading various exchanges and keeping prices in line, but there would still be less liquidity than in the case of all trading occurring on a single exchange.
Institutional investors are increasingly drawn to the finance sector of cryptocurrencies due to the high velocity and liquidity of asset-backed tokens like Tether. This is because these tokens, such as Tether, offer faster trading cycles, lower investment thresholds, and streamlined trading processes enabled by technology, attracting a broader spectrum of investors.
The efficiency of asset-backed tokens in settling transactions instantly on blockchain networks, together with the use of smart contracts for automating settlement and custody processes, reduces friction and contributes to the increased velocity observed in trading these digital assets.
