Most agree high volatility prevents many from using traditional cryptocurrencies for daily transactions. It’s not uncommon to see a 10-20% price fluctuation in a single day. Individuals find paying $5 for coffee today and $4 tomorrow, less than appealing. It’s difficult to budget if the means of barter is fluctuating faster than one can spend it. Can Stablecoins be a catalyst to mass adoption in decentralized banking?
An efficient cryptocurrency will have; price stability, scalability, privacy, and decentralization. Additional traits will assist in more cryptocurrency users and the market will become less volatile. Until then, the idea of an asset backed digital currency seems wise.
Stablecoins done correctly are; simple concept, effortless to understand, easy integration points for partners, and ability for uncomplicated transactions.
However, stability is key. Long-term stability is important for holding.
Short-term stability is important for transactions.
Short-term stability is important for transactions.
According to Finance Migates, “54 stablecoins now comprise 2.7 percent of the total market share of all cryptocurrencies, up from 1 percent in 2018; over $260 million in venture funding has been raised by stablecoin projects as of February of this year. Eighty-three percent of existing stablecoins are asset-backed, while the remaining 17 percent are algorithmic.”
With financial institutions wanting to emerge with new technologies while the crypto-community strives for adoption of digital currencies; Stablecoins may a compromisable solution.
After you read this, you’ll be able to determine the two types of Stablecoins. You’ll be current on all active and pre-sale Stablecoins. All information is in charts I’ve broken down into five different categories to compare and contrast, for easier reading and understanding.
Most importantly, you’ll be able to read an unbiased ebook on Stablecoins with opposing opinions and interviews from Thought Leaders worldwide. Seeing the advantages and disadvantages throughout every section of this guide will leave you the freedom to develop your own opinion, and be able to invest more wisely for your personal investment desires.
Thank you in advance for your kind feedback and keeping all information up to date.
What is a Stablecoin?
Definition: Simply stated, a Stablecoin is a cryptocurrency pegged to another asset. Or, a global digital currency solely unrelated to a central entity. Stablecoins make for practical usage of cryptocurrencies by allowing for secure, convenient transactions without the high volatility traditional cryptocurrencies hold.
History of StableCoins
While Satoshi Nakamoto’s vision for Bitcoin is to be used as electronic cash, the world’s first cryptocurrency is rarely used as a medium of exchange on a day-to-day basis. Rather, volatility and high fees make many cryptocurrencies impractical for daily transactions, therefore is used more as a long term investment.
Stablecoins offer all the benefits of cryptocurrency, including;
- cryptographic security
- ability to transfer assets digitally
- fast transactions
The concept of the Stablecoin officially appeared in the 2012 documentation attached to the first version of Mastercoin. The founders claimed Mastercoin protocol “will allow the binding of cryptocurrency to a stable traditional asset.” (A Brief History of Mastercoin; blog.omni.foundation)
It wasn’t until 2015, that Tether Limited released the first full-fledged Stablecoin. Tether or USDT is backed and pegged 1 : 1 with USD. The following year an European analog created EURT.
January 2016, an Ethereum platform contributor aimed to create the Stablecoin, DigixDAO. DigixDAO had DGD tokens paying for different operations with DGX. Criticism states this is not a StableCoin related to the asset not being gold, but with DigixDAO's reputation and their digital version of gold.
2018 brought nearly thirty Stablecoin projects preparing for ICO and pre-ICO and many expect that number to exponentially increase in 2019-2020.
Purpose & Need
The goals Stablecoins attempt to accomplish:
- Create stability among cryptocurrency trading pairs in forex-style trades.
- Aim to diversify portfolios in times of market instability.
- Desire to be used for daily transactions, as effortlessly as fiat.
- Aide in adoption of digital currencies.
- Form a new financial ecosystem.
- Assist in investment predictions by minimizing current cryptocurrency market volatility.
- Provide global access to a stable currency, protecting those plagued by hyperinflation.
*Benefits of Cryptoconomy. Low fees. Secure transactions. Somewhat or completely anonymous.
*Blockchain Technology Utilized. This ledger system brings security, transparency and accountability.
*Simple. System is easy to understand for fiat and digital currency users.
*Aids in Adoption. Acceptable bridge from fiat to cryptocurrency use.
*Smart Contracts. Placed to protect all parties with interest in investments.
*Regulations. Fiat-involving processes involved
*Centralized. Defeats purpose of cryptocurrency.
*Requires Third Party. Requires trust from an entity.
*External Audits Needed. To ensure assets are accounted for.
*Less Return on Investment. Traders and investors look to other means for financial gain.
*Lack of Education. New technology and processes take time for mass adoption.
*Regulations. Fiat-involving processes involved.
Example: Stablecoins tied to real world assets such as; fiat, gold, corn, oil, sugar, diamonds, wheat, sugar. Stable asset-backed cryptocurrency makes a great digital currency for everyday use by any consumer.
Particularly useful Examples;
*Fixed Income Investments. Asset management made easy.
*Loan Payments. Financial loans with benefits of ‘smart contracts’.
*Ordinary Payments. Everyday transactions.
*Recurring Payments. Mortgages, rent, subscriptions.
Criticisms & Quotes
Vitalik Buterin in a 2014 Ethereum article states, “Are stable-value assets necessary? “Given the high level of interest in "blockchain technology" coupled with disinterest in "Bitcoin the currency" that we see among so many in the mainstream world, perhaps the time is ripe for stable-currency or multi-currency systems to take over. There would then be multiple separate classes of cryptoassets: stable assets for trading, speculative assets for investment, and Bitcoin itself may well serve as a unique Schelling point for a universal fallback asset, similar to the current and historical functioning of gold.“
UC Berkeley’s Computer Security Researcher, Nicholas Weaver wrote Stablecoin Tether is “the primary vehicle for hiding money flows by allowing customers to switch between different cryptocurrencies. In short, they represent a significant problem.”
Preston Byrne, founder of Monax, wrote, “fiat-world examples of pegged assets form an object lesson in why you don’t try to peg currencies: because you are unable to hold the peg any longer than you can afford to subsidize your differences of opinion with the market.” Later stating, StableCoins are “the techno-magical idea that a cryptocurrency can tell the market what its price should be, rather than the market determining what a cryptocurrency’s price should be.”
“Distributed Stablecoins aim to achieve both the characteristics of crypto-coins like Bitcoin (censorship resistant digital transactions) and the price stability of traditional financial assets, such as the US Dollar or gold. These systems are distinct from tokens such as Tether, where one entity controls a pool of US Dollar collateral, ultimately making the system centralised and thus susceptible to being shut down by the authorities.” Preston Byrne
Nick Szabo stated central banks could soon turn to cryptocurrencies to shore up reserves, Finance Magnates reports Jan. 9. “There’s going to be some situations where a central bank can’t trust a foreign central bank or government with their bonds for example. One solution that’s been developed is to have the Swiss government hold it for you – that’s not a trust minimised solution. The Swiss government itself is subject to political pressures and so a more trust minimised solution is cryptocurrency.”
“Tyler and Cameron Winklevoss, Bitcoin (BTC) bulls and founders of the cryptocurrency trading platform Gemini, have said stablecoins and tokenized securities will usher in a bright future for the digital currency space. The twins made their remarks during an interview on Fortune's crypto-focused news segment The Ledger on Jan 14, 2019… Cameron further noted that with at least 60 percent of $100 bills now held overseas, dollars on the blockchain are poised to significantly reshape the global currency market.” released on CoinTelegraph 14, January 2019.
Key Factors for Evaluating Stablecoins
When investing in a Stablecoin, it’s wise to consider a few key factors;
Auditability. If not completely decentralized, do users have access to audit the systems financial fundamentals to confirm collateral?
Collateralization; Collateral defined; ‘To offer an asset as a surety that a debt will be repaid.” When ‘collateral’ or ‘collateralization’ is used in Stablecoin’s terminology, it’s the asset the borrower leverages in order to secure a loan from issuer. What is the collateral behind Stablecoin?
Fallback methods. What are the procedures in the event of system failure? What happens to assets? What regulations protect the users?
Growth. Does this ecosystem have stable stability?
Maintenance. What is the overall costs? The ecosystem loses efficiency when high overhead costs and excessive fees exist, thus risking market fluctuation.
Pegging; Stablecoins are often ‘pegged’ by an entity. Investopedia states, “Pegging is a central bank’s open market operations meant to stabilize its country’s currency to that of another country by fixing its exchange rate.”
Redeemability; Users are not always able to redeem their token exchange for underlying asset, one should know this before investing.
Stability methods. What is the underlying reason this is a stable investment? What guarantees and risks exist?
Transparency. If on a centralized system, are ledgers open and viewable by users?
Where to Find Stability; “Quantity Theory of Money”
Many Stablecoin White Papers state their cryptocurrency is designed based off ‘The Quantity Theory of Money’ to control currency supply with a goal of maintaining price stability.
The infographic shown is termed ‘The Fisher Equation”. Irving Fisher and Milton Friedman developed this equation in the 20th-century based off the popular orthodox theory by 17th-century classical economists, “Quantity Theory of Money”
Money Supply multiplied by Velocity of Circulation is equal to; Price level multiplied by Transaction volume. (M x V = P x T )
If M doubles while V and T remain constant, then P theoretically will double; therefore the value of each individual unit of currency will be cut in half.
Majority of notable economists accept ‘The Fisher Equation” as valid over long-term use. Therefore, with this pre 17th-century theory in mind, economists state Stablecoins will maintain price stability by increasing or decreasing money supply.
Stablecoins can remain stable based on this concept because, if the cryptocurrency’s value drops below a certain price point, its users drive the crypto to be scrapped, decreasing the total supply of tokens, which stabilizes its value. If the token’s value rises beyond a certain price point, users incorporate more supply to keep cryptocurrency at fair market value.
Being an aged theory, there’s some problems with The Quantity Theory of Money. An example being; V and T are assumed to be constant for the long term. Consequently, M and P are perfectly proportional. Thanks to intelligent design, this theory was developed based on an advanced economic structure which assumes money velocity and transaction would be consistent. However, blockchain projects are rapidly changing and the technology is in its infancy, therefore it’s difficult to calculate token velocity and transaction volume, and assume they’d be constant. Considering V and T as variables, it may be time, once again, to add more variables to ‘The Fisher Equation”.
*footnote* The Quantity Theory of Money argues in the long run, currency value, alike commodities, can change in accordance with supply. If the exchange rate today is $1 = ￦2000 (weaker KRW), the exchange rate could become $1 = ￦1000 (KRW appreciates) by decreasing circulating KRW by half.
Types of Stablecoins:
Asset-Collateralized vs. Non-Collateralized
Define Asset-Collateralized Stablecoins. The socially agreed upon currency most countries use is termed ‘fiat’, which literally means ‘something that was created without effort.” Until 1971 world currencies were backed by gold. Before printed money; diamonds, silver, gold, land, estate and other goods were used as means for barter. Shifting from an asset backed currency to the current fiat system left centralized banks, governments, financial technologists, private entities, and economic experts with the concept of Asset-Collateralized Stablecoins. These specific Stablecoins’ purpose is to tokenize stable assets on a blockchain serving as a digital currency for means of speedy, secure and stable daily transactions. Stablecoins in this category should be guaranteed to exchange 1 : 1 Stablecoin for its underlying asset.
Define Non-Collateralized Stablecoins. One argument states, fiat is not backed by any tangible asset, therefore; why should cryptocurrency only have value as an Asset-Collateralized Coin? Opposing argument suggests currency must have some agreed upon “value”. Non-collateralized stablecoins were created as a medium. This digital currency is not backed by any real-world or cryptocurrency asset, but instead, maintains value by its users expectations maintaining a certain value. The main Non-collateralized approach is the Seigniorage Supply (Algorithmic) Stablecoin Model.
How to use StableCoins to Your Advantage.
How to Protect your Assets.
The information gathered from pages of sources I’ve put put together in this E-book will leave readers confident in their knowledge of StableCoins. Muhammad Tahir-ul-Qadri stated, “If knowledge is not put into practice, it does not benefit one.”
As an educated individual there’s a few things you can do so your newly acquired wisdom, and time is not wasted.
Quickly Trade Fiat to Cryptocurrency. Nearly every exchange in existence allows crypto to crypto trading. Very few exchanges allow you to trade crypto directly for fiat. This is where Stablecoins are particularly beneficial in today's digital currency trading market. Many Stablecoins are 1:1 equivalent to fiat, therefore, investors can almost instantly sell crypto for Stablecoins and quickly trade to fiat, without leaving preferred cryptocurrency exchange.
Be Among the first in Fintech. There’s no question digital currency is the future. Milton Friedman, 1976 Nobel Memorial Prize winner in Economic Sciences for his research on consumption analysis, monetary history, theory and the complexity of stabilization policy, famously quoted, “I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed, is a reliable e-cash.” Daily use of Stablecoins allows riskless, interchangeable payments with fiat but with secure and digital benefits. Stablecoins can be used for convenience, which catches the attention of your peers. Stablecoins can then be used as an educational bridge for cryptocurrency, as blockchain technology continues to develop from its infancy.
Use Stablecoins to Protect your assets. Using "Stop Loss”, ''Hedging" and ''Harvesting". *keep reading for examples...
How to Protect your Assets. Stop Loss.
When trading, it’s hard enough to correctly time one market let alone two. The last thing anyone wants is to watch investment profits disappear before their eyes.
For less advanced crypto-traders;
“Typical” Cryptocurrency Exchange Steps are as follows;
- Obtain Bitcoin or top Altcoin with centralized fiat-to-cryptocurrency exchange platform. (Allowing deposits)
- Transfer cryptocurrency to preferred digital currency trading exchange.
- Trade, obtain, exchange, etc. on preferred trading exchange.
- To trade newly obtained crypto for fiat or protect assets in fluctuating market; trade crypto back to Bitcoin or top Altcoin on preferred trading exchange.
- Transfer cryptocurrency to centralized cryptocurrency-to-fiat exchange. (Allowing withdrawals)
- Sell Bitcoin or Altcoin on exchange and withdraw to your bank account.
- Wait 3-7 days for bank transfer.
- Added fees with each exchange/transfer/trade/buy/sell
Stop Loss Method. To stop loss in a volatile cryptocurrency market, simply exchange digital currency for Stablecoins. Use ‘hedging’ and ‘harvesting’ (discussed below) to gain a profit in a declining market.
Example. We’ve all been there… You keep refreshing the page while the exchange waits for enough confirmations to consider it approved. Now you can START to trade it for fiat! NOW your profits are safe!
A few minutes here, a few minutes there... it all adds up.
In that 10 to 20, maybe 30 minutes, what’s happened to the price of Bitcoin?
A “whale”, another ban from China, or CNBC reporting “Bitcoin Died (Again) Today” can show a 30% decrease in your portfolio.
Stablecoins, while certainly not guaranteed to hold their value, provide a much more likely way to solidify profits.
Using them as a method to stop loss during market dips can save a trader a great deal of loss.
How to Protect your Assets. Hedging and Harvesting.
Considering volatility, hedging and harvesting are wise, yet advanced investing strategies that’ll lower the overall risk found in a cryptocurrency portfolio. This method manages safe, effective increase in profits and saves the investor; time, exchange fees, transfer charges, and transaction costs.
Simply explained; one trades fluctuating cryptocurrency investments into Stablecoins to rebalance portfolio in market dips to secure more investments, and reinvest profits gained during market highs.
Hedging with Stablecoins
Definition: Textbooks state “a Hedge is an investment to reduce the risk of adverse price movements in an asset.”
Investopedia says, “One must use various instruments in a strategic fashion to offset the risk of adverse price movements in the market. The best way to do this is to make another investment in a targeted and controlled way.”
Heading is a complex investment technique utilized to reduce risk. A successful hedge shows no portfolio losses.
Portfolio begins with $1000; 50% Bitcoin and 50% Stablecoin.
In the event the Cryptocurrency Market Decreases by 20%, the portfolio is over-allocated to a Stablecoin (55.56%) and under-allocated in Bitcoin (44.44%).
To rebalance portfolio, buy 50$ BTC with Stablecoins. The portfolio is once again 50/50.
Thanks to the Stablecoin security, there’s minimal loss in overall portfolio. Bitcoin only decreases comparatively to the US Dollar . Investor’s actual amount of Bitcoin held does not change .
In rebalancing the portfolio the investor accumulates more Bitcoin at market dips. This is beneficial in a market increase and our Harvesting scenario.
How to Protect your Assets. Hedging and Harvesting.
Harvesting Bitcoin Profits while Hedging with Stablecoins
Definition: Harvesting. “This method is commonly referred to as an exit strategy, as investors seek to exit the investment after its success. Investors will use a harvest strategy to collect the profit from their investment so that fund can be reinvested into new ventures.” Investopedia.com
Employing a harvest strategy will allow one to harvest maximum profits before market reaches a decline stage.
In the event the Cryptocurrency Market Increases by 20%, this portfolio will hold more value in Bitcoin.
Harvesting consists of taking the Bitcoin profit and reinvesting. Rebalance portfolio by taking the 20% Bitcoin profit and purchase Stablecoins.
Portfolio is once again 50/50, however your Return on Investment (ROI) has increased.
The Future of StableCoins; Final Thoughts
CoinTelegraph writes, “Various models of stablecoins have surged in popularity last year… research firm Diar published an analysis saying that the adoption of stablecoins is growing based on the increasing number of on-chain transactions. As per the study, the same four major stablecoins to date have broken the $5 billion mark in on-chain transactions within the three-month period”.
Stablecoins are already considered commodities and traded among crypto exchanges. Naturally, during cryptocurrency market fluctuations, Stablecoins hold their value better. An example of this was during the largest cryptocurrency market crash when many currencies dropped 30-70%. Tether, a USD-backed Stablecoin, held out within 8%.
Whether you’re ‘for’ or ‘against’ this type of digital currency, most can agree there would be great convenience in a high-quality Stablecoin, allowing the use of fiat on crypto exchanges, in today’s world. Stablecoins allow users to be relatively quiet for their assets taking advantage of many positive aspects of crypto economy.
Crypto- Enthusiasts will argue Stablecoins are not cryptocurrencies on the basis that they’re;
- Centralized. Some users aren't sure binding to a traditional banking system can provide a decentralizovannost and anonymity to the owner.
- Backed by an ‘illusion’. Some argue cryptocurrency is ‘fake money’, however, fiat was backed by gold until the 1970’s and now has no asset standing behind it.
- Cryptocurrency represents a unique code written down in memory of an unhackable computer network, or a digital ledger. Adding a traditional asset often demands special storage conditions, funds for providing these conditions and requires a third party to be involved for auditing. Once again defeating the entire purpose of cryptocurrency economy.
Stablecoins with real-world value assets can be used in everyday life; which opens the door to overall cryptocurrency adoption. After a majority use digital cash, say in the form of Stablecoins, the cryptocurrency community can better education on the benefits of decentralization and need for a trustless cash exchange. With digital cash experience, there’s less to learn in a new, highly complex, and ever evolving financial technology ecosystem. Crypto-Enthusiasts can’t disagree StableCoins could be the key to more people using Bitcoin and AltCoins in the future.
In conclusion, Stablecoins may be a crucial element for a dynamic cryptocurrency future. Advancing mainstream cryptocurrency adoption may require Stablecoins as viable hedging mechanism in the highly volatile market.
I've broken down each Stablecoin category in to 5 sections. You can see those at these following places.
Asset-Collateralized coins, also known as, Fiat-Collateralized StableCoins found in my publication here.
I also covered Crypto-Collateralized StableCoins. That article can be viewed here.
Then switched things up a bit and visited the only Non-Collateralized StableCoin Category, Seigniorage Supply (Algorithmic) StableCoin Model. Enjoy the description of the futuristic currency model here.
Next? A simple to understand category among a Asset-Collateralized group; Metal-Collateralized Stablecoins found here, with a long list of promising projects.
Lastly, combining asset backed and non collateralized crypto’s, we have our Hybrid StableCoin Model Category. View this here.
Tell me what you think.
What am I missing?
What would you add?
What’s your personal opinion on Stablecoins?
I’d love to professionally discuss, collaborate and connect with you all. Would love any feedback, positive and negative; as I’m only here to improve and educate myself/others.
So, how can we mutually benefit one another?