Is There Substance Behind the Stablecoin Hype?
Right now, there is a lot of noise in the cryptocurrency community about stablecoins and how they are the future of cryptocurrency. Stablecoins or asset-backed currency is nothing new, so what is behind all this stablecoin hype that has emerged suddenly and is there any substance to it?
What Are Stablecoins?
Cryptocurrency markets are a volatile place with currencies rising bullishly and then collapsing dramatically. These peaks and troughs are made all the worse because they seemingly happen with little or no reason and because they happen quickly. The nature of crypto trading is as much gambling and guesswork as it is trying to read and evaluate the wider market.
This erratic behaviour of the major cryptos like Bitcoin has caused many to lose vast fortunes and caused even more to feel disenchanted with crypto. Traders that were losing out started demanding a more stable trading environment, one that was fairer for all and not the few that held power to influence the markets.
This led to the resurrection of a very old currency trick from the real world. Asset backed currencies. It also led to the development of stable coins, cryptocurrencies that always retain a set value.
Will Stablecoins Work?
Stablecoins will likely work in the short term. For example, the US dollar was once a gold-backed currency until the federal reserve couldn’t stockpile enough gold to match the amount of money being printed. There are rumours abound now that the dollar is partially an oil backed currency but that is a conversation for another day.
Regardless, the US dollar worked well for a time until the resource used to back it was in short supply. This is pretty much what will happen with all stablecoins and asset-backed cryptocurrencies if they grow into mainstream use. There will come a time where it is simply not possible to physically back the currency with any asset and at that point the currency will either need to do away with asset backing and hope the economy is robust enough to prop it up (as with the US dollar) or it will collapse entirely.
It is for this basic economic principle that stablecoins for me are all hype and no substance because no matter how they develop they will all have a point where they are no longer able to be stablecoins. For some this is fine and the short term security is worth the long term uncertainty, but for most this is a trade off that is unacceptable, especially those of us who hold onto cryptocurrency knowing that the longer time frames generate the best returns as they have in the past.
For traders there is really no incentive to buy up stablecoins and the stablecoin hype is just a lot of noise and nothing more. For crypto users there is more attraction to stablecoins because they will be able to transact on a more level playing field and this is excellent – except next to nowhere in the real world accepts stablecoin payment and very few people use cryptocurrency as actual currency at the moment.
This will be a long-forgotten fad in a few years and people will be joking on forums about how others were duped into a false sense of security and lost a lot of money along the way. The real promise still lies with traditional cryptos for me like Bitcoin and Ripple.