Coinbase Research Report: Stablecoins Become the "Behind-the-Scenes Winners" in the Prediction Market

Source: Coinbase; Author: David Duong CFA, Colin Basco; Compiler: BitpushNews

Main Points

• Geopolitical risks are easing, and the Israel-Iran ceasefire has stabilized the market. Concerns about tariffs have eased, and downward inflationary pressures are more likely to support the Fed's rate cuts.

• Polymarket's success and high valuation highlight the market's attention to consumer-centric applications, especially prediction markets, and its development momentum is expected to accelerate.

Market Overview

Geopolitical risks are fading?

Since the ceasefire agreement between Israel and Iran on June 23, market sentiment has stabilized and the COIN50 index has rebounded along with the US stock market. In fact, the 25 delta put-call skewness of Bitcoin 30-day options has begun to decline after a surge last week, while the skewness of 90-day and 180-day contracts is in negative territory.

This suggests that the market demand for downside protection in short-term Bitcoin put options has eased. We believe that longer-term options show that investors want to gain Bitcoin exposure but do not want to pay the upfront costs in the spot market, which reflects a slight bias towards out-of-the-money call options. Implied volatility for 1-week and 1-month contracts has fallen sharply, making it less attractive to sell volatility at this time.

Nevertheless, there is still lingering uncertainty about whether tensions may flare up again. Looking ahead, we believe the most likely potential scenarios include:

• Maintaining the status quo, characterized by a fragile and tense balance, with Iran continuing to use its nuclear program and regional proxies to project influence, essentially buying time without crossing clear red lines.

• The second, more severe scenario involves limited military escalation, given Israel’s residual concerns about Iran’s nuclear capabilities.

• Closing the Strait of Hormuz, which carries a fifth of global oil consumption, would be a major red line, signaling an escalation of the conflict. However, we believe this scenario is unlikely to occur, as not only does a ceasefire reduce this threat, but such an action would severely damage Iran’s own economy. As such, we believe buying dips into geopolitical events may still be a viable market strategy at this time, consistent with our latest monthly outlook.

What about tariffs?

Despite the approaching July 9 deadline (August 12 for China) to suspend reciprocal tariffs, there has been no notable progress on a trade deal—despite a rare earth shipment deal with China and a proposal to the European Union. Yet both traditional and crypto markets have largely ignored the economic risks that could arise from this, in part because it is not reflected in economic data.

Federal Reserve Chairman Powell testified this week before the House Financial Services Committee and the Senate Banking Committee that inflation could still be affected by tariffs later this summer. (Notably, President Trump subsequently announced that he could appoint Powell’s successor as early as September or October of this year.)

But keep in mind that goods only make up about 20-25% of the core CPI basket, and it’s unclear whether businesses will fully pass on tariff costs to consumers. Moreover, service prices have been falling since mid-2024 and are more sensitive to long-term developments such as artificial intelligence in the long run. In fact, we believe the impact of tariffs is more likely to be deflationary due to its net effect on aggregate demand. In our view, this will continue to push the Fed to cut interest rates in the second half of this year. All of this may explain some of the market complacency regarding tariffs, which we believe may continue until the upcoming deadline. Ultimately, we do not believe that trade barriers pose a significant risk to our constructive outlook for the third quarter of 2025.

Regulatory Update

The Guidance and Establishment of a United States Stablecoin National Innovation Act (GENIUS Act) has passed the U.S. Senate by a vote of 68 to 30 and is currently under consideration in the House of Representatives. House Majority Whip Tom Emmer (R-IN) is attempting to merge the bill with the CLARITY Act (House Market Structure Act), but given the complexity of the latter's content, this process may result in delays. Notably, President Trump has called on the House of Representatives to pass the GENIUS Act "without delays and without additions." Separately, Senate Banking Committee Chairman Senator Tim Scott (R-SC) said a crypto market structure bill is on track to be completed by September 30.

In addition, on June 23, Senator Adam Schiff (D-CA) introduced the Official Income Limitation and Non-Disclosure Act (COIN Act), which seeks to limit the ability of senior executive branch officials and their immediate family members to issue, sponsor, or endorse digital assets.

Meanwhile, the Federal Reserve announced this week that it will no longer include reputational risk as a component of its bank supervision and examination program. This appears to be a continuation of the current administration's deregulation under the Operation Chokepoint 2.0 policy. Given the subjective nature of "reputational risk," previous guidelines have led to the crypto industry being systematically excluded from banks.

Polymarket: A new unicorn in the crypto space?

This week, decentralized prediction market platform Polymarket sought a valuation of approximately $1 billion in a round led by Founders Fund, becoming crypto’s newest unicorn.

Just one day later, regulated competitor Kalshi announced a $185 million round at a $2 billion valuation.

Together, these deals show that venture capital this week is focused on distribution moats (consumer-facing applications) rather than liquidity moats (token chains and DEXs), with real-time event marketplaces leading the way.

Driving the valuation are its strong usage metrics. Despite regulatory barriers preventing U.S. users from trading, Polymarket has seen more than $14 billion in total trading volume, including approximately $1 billion in May alone. The platform averages 20,000 to 30,000 traders per day, surpassing many mid-cap DEXs and demonstrating its ability to attract a non-crypto native audience.

With a new content partnership with X (formerly Twitter), positioning prediction markets as viral social content rather than pure financial tools, its momentum is expected to accelerate further.

Stablecoins - especially USDC - are its hidden beneficiaries.

Polymarket's transactions are settled in USDC on Polygon, and these stablecoin flows are reflected in on-chain metrics. For example, in November 2024, when headline news events drove market attention, monthly trading volume soared to $2.5 billion, triggering a surge in USDC transfers and cross-chain bridge activity. Unlike lending protocols that lock up a large amount of total locked value (TVL), prediction markets have fast capital turnover, and high-frequency settlement activities drive a large amount of on-chain payment behavior.

Coinbase Exchange and CES Insights

This week, Bitcoin in the crypto market held the $100,000 mark, while the broader market was in a consolidation state.

In the housing market, the U.S. housing mortgage regulator issued an order requiring Fannie Mae and Freddie Mac to consider cryptocurrency holdings as assets when assessing housing loan risks. We also saw continued inflows of funds into spot BTC and ETH ETFs, and BlackRock (Invesco) also submitted an application for a spot SOL ETF, the ninth application to date.

All of this, coupled with ongoing tensions in the Middle East and comments from Fed Chairman Powell, have kept traders constructive. Perpetual contract funding rates are in the low to mid-single digits, and positions appear relatively neutral, which may leave room for further gains.