There’s been a lot of buzz about stablecoins recently. Regulators, in particular, have shown a lot of interest in them. Pundits are optimistic about this form of cryptocurrency. Could stablecoins drive the widespread adoption of cryptocurrencies? In this post, we’ll attempt to answer that question.
What are Stablecoins?
Stablecoins are also a cryptocurrency. Unlike traditional cryptos like Bitcoin, their value is asset-based. A standard cryptocurrency is very volatile. Market sentiment can make the value soar or plummet because traditional cryptos are purely market-driven.
Stablecoins, on the other hand, are backed by actual assets. They operate more like a normal fiat currency as a result.
Why Are Stablecoins Getting so Much Attention?
Pundits believe that stablecoins have a more stable value. This could lead to them being more widely accepted by vendors. At present, Bitcoin is the most commonly used currency for payments. You can use Bitcoin with vendors like Microsoft, Big Fish Games, and NameCheap.
Smaller vendors, however, might not have the cash reserves to bet on Bitcoin. The Bitcoin value is simply too volatile. Stablecoins might provide a viable alternative. At the moment, Tether is the most popular stablecoin.
Tether attempts to match the dollar exactly in terms of value. The idea is that you can buy one Tether for one Dollar.
Will Stablecoins Replace Bitcoin and Other Cryptos?
It’s too early to say. Stablecoins offer a significant benefit over traditional cryptos. You get the benefits of your traditional cryptos but without the market volatility. It’s an interesting concept and might be seen as an improvement on the traditional model that we’re working with.
More stability could drive greater market acceptance. This could lead to the traditional cryptos being viewed purely as a speculative investment. With viable alternatives, it’s hard to imagine that traditional cryptos will survive in their present format.
What are the Potential Issues?
That said, there’s more than just market sentiment to consider here. Stablecoins will act more like fiat currencies. Their strength is determined by the value of the underlying assets. If these assets lose value, so will the currency.
We saw as much with Tether. Between 2015 and 2017, it kept a steady value of around a dollar. Problems that Tether had with their bankers saw the currency drop to $0.92. That’s not a huge difference, but it shows that its values can also fluctuate.
Tether has had other problems since. They don’t allow independent auditors to assess their assets. This has proved problematic for them because it’s shaken market confidence. Are there really sufficient assets to back the currency? What liabilities does the company have?
These are issues that affect several stablecoins. As a result, the future of these coins is not as clear as we’d like. As adoption increases, the coins will face similar risks as your traditional banking organizations.
If everyone decides to sell their coins at once, it’s the same as a run on a bank. The company won’t have sufficient assets to cover all the withdrawals. The same is true of large withdrawals.
It seems that there are still some issues to be worked out. Stablecoins may well be subject to market manipulation. In 2017, we saw the effects of a sudden loss of confidence in Bitcoin. Experts now believe that this was due to serious market manipulation.
If we look at traditional currencies, we see something similar. Despite being asset-based, there is always the possibility of market manipulation sending a fiat currency into a downward spiral.
There is no clear-cut conclusion to be drawn here. Stablecoins look promising, but there are still issues that need to be addressed.