Abstract

This study investigated the de-pegging effect of stable coins in the crypto market considering the increased growth in crypto lending using DeFi (Decentralized Finance). Employing an event study method and using the trading data of a select sample of stable coins and cryptocurrencies in more than two-year post-pandemic sample period (01 January 2021-30 March 2024), the study examined whether there was a spillover effect of stable coin crisis into the cryptocurrency market. The event study results showed that prior to the de-pegging event, there was a sharp decline in abnormal returns of both stable coins and cryptocurrencies. The univariate, event study and logistic regression estimations support the study predictions that the de-pegging event of USDC affected the crypto market adversely including the cryptocurrencies. Despite the claim of maintaining a pegged value, the stable coins were found to be prone to volatility mainly due to their involvement in DeFi lending. Although both USDC and DAI recovered fast and reached their pegged values of US$1, probably due to the immediate intervention of the FED in the March 2023 banking crisis, the recovery was short-lived. This is a lesson for crypto investors who patronize DeFi lending platforms in pursuit of yield farming and staking that stable coins are no longer stable as they claim to be, and they can be as volatile as cryptocurrencies.

Keywords: Stable coins, Cryptocurrencies, De-pegging, Event study