Cryptocurrencies have one obvious flaw – their value keeps yo-yoing up and down.
That’s not such a big issue for a speculative asset. On the contrary, for that purpose it may even be a virtue.
But cryptocurrency still has the word currency in it. It implies its primary use is to serve as a form of payment.
That’s not really possible as long as these digital coins can shed half their value on your way to the store.
It’s the reason we still don’t view cryptocurrency exchanges as currency exchanges but rather as penny stocks on steroids.
Pouring money into cryptocurrencies as of yet feels more like taking a punt even though their creators tout it as an investment in the future of money.
New cryptocurrencies attempt to do away with this long-held reservation. They vow to take out the casino-element by anchoring them to real-world assets like gold or paper currency.
This new type of crypto coins has been labelled “stablecoins” and leaves no confusion about their intended purpose.
Are stablecoins what it says on the tin or is the speculative element essential to cryptocurrency’s very existence?
Volatility is arguably the biggest obstacle to cryptocurrencies becoming more widely used.
Bitcoin, the crypto that started the digital currency hype, moves as much against the dollar in a day as the S&P 500 does in 23, notes the Economist.
It was still “OK” as long as bitcoin’s value only seemed to go up against the dollar – as it did last year. Payment in bitcoin was a lucrative alternative to paper currency then.
This year the fortunes of cryptocurrencies have changed.
Bitcoin and ethereum, the two flagship coins through which most other cryptos need to be bought and sold, are down more than two-thirds from their peaks. Most other cryptos have gone down with them.
It doesn’t inspire much confidence in cryptos as a method of payment.
Only Venezuelans and Zimbabweans might still see bitcoin as a more stable alternative to fiat currency, but that’s only because hyperinflation has rendered their national currencies utterly worthless.
For those of us who don’t tend to compare cryptos to the Venezuelan bolívar or the Zimbabwean dollar, digital currencies still look awfully unstable.
They’re a new type of cryptocurrency designed to – you guessed it – hold a steady price. Their developers want to shift the emphasis from crypto to currency.
How might that work?
Well, you simply back something with no intrinsic value by something that does.
Digital-only cryptocurrencies get tied to physical assets, like gold or paper currencies. It’s supposed to create some kind of “gravity” so crypto values can’t float as much.
Explains the Economist:
“Most stablecoins are backed by real-world assets such as fiat or gold. Some are collateralised by a basket of cryptocurrencies. Others have no collateral at all, but are controlled by an algorithm that increases or decreases supply to keep their prices stable.”
Stablecoins are growing in numbers. At least 20 are already trading on crypto-exchanges with many more stablecoin launches on the horizon.
Even though stablecoins only make up 1.5% of the total value of cryptos in circulation, they’re involved in a relatively large share of overall trading.
Stablecoins are a nifty invention for cryptocurrency traders.
They’re the ideal place for them to park their crypto assets when the market looks particularly volatile. It allows them to ride out the storm without converting back into paper currency.
“Stablecoins serve as a means of jumping in and out of trades, without having to cash out into your bank account every time,” says Cryptocurrency Profits editor Khashayar Abbasi.
“They simply provide stability in an otherwise volatile crypto world.”
Venture capitalists see a lot of potential. Andreessen Horowitz and Google Ventures are leading the way with stablecoin investments totalling more than $350 million.
Stablecoins are a good idea, but can they live up to their name?
The biggest stablecoin around is Tether, a coin backed by dollars with a trading volume of about $2.5 billion. Tether’s dollar peg is meant to ensure a single token is always worth $1.
But the company behind Tether has yet to prove it has the funds necessary to stay pegged to the dollar.
It’s why Tether experienced one of its largest ever sell-offs last week amid uncertainty around the coin and whether or not it is actually backed by anything.
“Stablecoins haven’t been as stable as they’d like to be,” admits Khashayar.
“For example, when Tether was added to crypto-exchange Binance, it rallied 10% above its intrinsic worth, probably due to bots just buying up the new coin.
“As the crypto markets mature, instances like this should reduce in frequency and stablecoins will become less volatile.”
Big corporations are betting on these start-up problems going away over time.
IBM has lent its backing to Stronghold USD, another stablecoin that’s looking to maintain a 1:1 price ratio with the dollar.
Meanwhile PricewaterhouseCoopers has partnered with stablecoin Cred. The accounting firm predicts that once the lack of trust in stablecoins has been overcome it’ll “usher in the next 100 million users of crypto assets”.
Not everyone is that optimistic.
“Experts outside the crypto-sphere are not convinced that stablecoins are here to stay,” writes the Economist.
“That is not solely because their pegs may break, as can happen with real-world currencies and assets.
“Among other things, they could be used to evade the taxes that become due in many jurisdictions when cryptocurrencies are exchanged for fiat.”
Naming something stable doesn’t automatically make it stable. The bald eagle isn’t actually bald, after all.
Still, stablecoins address a gap in the market. If they manage to win over sceptics, it could prove a vital step in making cryptocurrency actual currency.