In a world of volatile cryptocurrencies, “stablecoin” is the term used to describe coins that have a relatively stable value. Typically, such coins are pegged to the value of a traditional fiat currency (such as USD or EUR), financial assets or commodities.
In reality, of course, there is no such thing as a truly stablecoin that maintains a relatively fixed value. Even when we speak of traditional fiat currencies, we see rates fluctuate on a daily basis, (granted, not as much as the BTC price). If you take a look at stablecoins’ price charts, you will see that their price remains approximately the same when the crypto market is flat. However, once the bull run begins, the prices fluctuate alongside a turbulent industry to some extent.
This article investigates why the market needs stablecoins at all, how they manage to maintain stability, what projects are currently in existence and what dangers they conceal.
Why stablecoins are needed
The main benefit of stablecoins is, of course, the confidence in your funds’ consistency. When you store your cryptocurrency investments in stablecoins, you can be sure that the value of your portfolio will not change, regardless of what happens to the crypto market. This is especially relevant during a downturn.
The allure of stablecoins extends even further. In addition to their consistency, stablecoins owe their appeal to three factors:
- For cryptocurrency investors: stablecoins are an ideal tool for fixing your profits (or losses). It’s difficult to convert BTC to traditional fiat currencies due to multiple regulatory restrictions. The rate may change a hundred times until you find some roundabout routes to do this. But when converted to USDT or its alternatives, the value of your funds will remain the same.
- For cryptocurrency exchanges: Regulators impose strict rules for exchanges to be able to convert cryptos to fiat (USD, EUR, GBP, etc.) and not all exchanges can pass the required level of compliance. With trading pairs that include stablecoins, exchanges significantly increase their liquidity.
- Mass adoption: While cryptocurrencies remain so volatile there are no chances for their mass adoption. With the permanency offered by stablecoins, it would be possible to make use of blockchain benefits in our daily lives.
Talking about volatility, the next question arises. How do stablecoins manage to maintain their stable rates? Let’s find out.
How stablecoins work
Tether, the company issuing the most popular stablecoin USDT, claims on its website that “every tether is always backed 1-to-1, by traditional currency held in our reserves”. And this is exactly how it should work – in the ideal world.
For every dollar that a company receives from the outside, it issues 1 USDT and the circulating supply of USDT should be equal to the amount of USD that is held on the company’s bank accounts. When selling the tokens back you receive an appropriate amount of USD and the tokens are burnt. Thus, the stable rate is maintained. The essence of the business model is the fees that the users pay when buying Tether coins.
In fact, the company just prints tokens at zero costs and receives real money for them, makes profits out of the thin air. This is a legalized form of counterfeiting which opens a huge scope for different financial manipulations.
Of course, Tether is audited once in a while to prevent unscrupulous operations. But the question is: who can check their auditors and make sure that everything is clean?
The problems with stablecoins
In the light of this situation, there are some basic concerns when using USDT or its analogies.
- The trust in the third party: Since a stablecoin is issued by a single company, you have to fully rely on it, which makes your position more vulnerable. Stable coins are centralized and this goes against the core idea of decentralized currencies.
- Volatility. The term “stablecoin” implies the stable value of the asset, not that it brings stability to the market. In fact, stablecoins make cryptocurrency market even more volatile as they open the gates for further speculations.
- Most stablecoins fail. Apart from Tether, there was almost no other stablecoin that would live longer than a year so far. When the issuing company stops its operations, your funds may be gone for good in a second.
Tether loses its dominance
Tether has been around ever since 2015 and has been maintaining dominating position compared to all other stablecoins throughout all this time. None of the projects that have been launched over this period has managed to live as long and to gain such huge capitalization.
However, the cryptocurrency downtrend that has been lasting for the whole of 2018 has caused the increase in demand for stablecoins. A range of new currencies has been launched, helping investors diversify their portfolio and decrease the risks.
As a result, Tether’s dominance has decreased from 96% before October 2018 to 73% in December 2018.
The list of stablecoins
The coins listed here are those that have made it to CoinMarketCap. The ultimate list goes much further than what we review here, but all other projects are too small and don’t have any significant influence on the market as of now.
- Tether: So far, this is one the oldest stablecoin in the market as it was launched in March 2015.
- TrueUSD: This is the token that fuels the TrustToken platform. This is a relatively new project that has been launched in March 2018.
- USD Coin: This coin is issued by Circle, the government-backed company that purchased the cryptocurrency exchange Poloniex in February 2018.
- PAX: This is a new coin issued by the company Paxos in October 2018.
- GUSD: The coin was launched by Gemini exchange at the same time with two others mentioned above.
- XCHF: The new coin was issued by Swiss Crypto Token AG in January 2019 with the main purpose to support Swiss blockchain ecosystem. You can read our interview with the CEO of Swiss Crypto Token AG, Armin Schmid.
The following projects are now either dead or are traded at very low volumes.
- sUSD (Synthetix, formerly Havven): Launched in July 2018, this coin is now traded only at KuCoin with around 4,000 USD daily trading volume.
- bitUSD: This project was launched in the late 2014 and has managed to make it through till our time. But it hasn’t gained too much popularity and is now traded with a little bit more than 1,000 USD daily trading volume.
- USNBT (Nubits): This coin is now dead since it couldn’t have coped with the market demand during the overall correction in March 2018. It ran out of reserves to support the peg and the market wasn’t so eager to help it. Now its price has dropped below 0.05 USD and it’s hardly likely that it will ever revive.
Stable coins are a good tool to save your investments in the times of the downtrend. But it’s not recommended to hold your crypto funds in only one stablecoin over a long-term period as the issuing companies can go bankrupt at any time.
Stable coins are just another tool of the crypto market which is manipulative by its nature. However, this tool can stimulate blockchain mass adoption if issued by the government. The future will show where stablecoins will lead us to.