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Bitcoin plummeted from a high of nearly $ 20,000 in December 2017 to a minimum of $ 3.655. So it is understandable that some users of cryptocurrency may look for more stability. With the future of Bitcoin and other uncertain cryptocurrencies, a possible new solution known as "stablecoins" has emerged. This cryptocurrency aims to maintain its value better than others, which could offer investors greater stability.
Cryptocurrencies are digital tokens that act as a form of currency, allowing people to execute transactions without a bank or intermediary. Most cryptocurrencies have no intrinsic value and get their price from what others will pay. This, together with the speculation on prices by those hopeful values, has led to a significant volatility in the prices of cryptocurrencies.
Unlike other cryptocurrencies, stablecoins aim to maintain their best value by being redeemable for something else of tangible value, such as regular legal currencies such as the US dollar or even gold.
The underlying assets of risk capital (the monetary value that investors expect to trade) will normally be deposited with a trusted bank. If people are confident that they can redeem these currencies in exchange for that currency and that the issuer has sufficient reserves for all currencies in circulation, the price of the stablecoin should not fall below the value of the underlying asset .
The most used stablecoin are Tether, TrueUSD and USD Coin, which bind their value to the US dollar. Tether recorded some short-term volatility, fluctuating between $ 0.99 and $ 0.95. TrueUSD remained stable, but the USD currency had a slight instability, although even its largest decline remained at 1.8% of the dollar. Therefore, compared to other cryptocurrencies, the stablecoins remained stable.
But there is nothing technical about keeping the price of the stablecoin at a fixed value. If people lose the confidence that the issuer has sufficient resources to honor the value of all currencies in the event of redemption, this could lead to significant price changes. The price could also increase if demand exceeds the offer of a stablecoin.
Because you're stablecoins becoming popular?
The recent collapse of Bitcoin and other cryptocurrencies, together with inconsistent exchange prices between stock exchanges, have influenced the perception that cryptocurrencies are unpredictable. The idea of a cryptocurrency with a fixed value has an understandable appeal, especially among those who want to make purchases with cryptocurrencies.
Furthermore, cryptocurrency exchanges are moving away from interaction with banking systems due to the increase in interest and regulatory attention in cryptocurrency operations. In some notable cases, trades have even frozen their funds at banks. This has led to some popular cryptocurrency exchanges not allowing more transactions between cryptocurrencies and real money. So, to buy on these exchanges, people need already existing cryptocurrencies, making the stablecoin a good option to get started.
Do computer algorithms maintain stability?
Strapecoin based on seigniorage are the latest developments. They use computer algorithms to control the availability of the stablecoin by buying it and selling it automatically based on real-time prices, ideally keeping the price of a stable currency.
If prices increase, the reserve currencies will be made available for purchase, which increases the supply and reduces the price. If the price falls, the algorithm can buy back coins (using other cryptocurrencies contained in reserves) to reduce the offer and increase the price.
But if the offer increases too quickly, the algorithm will not have sufficient funds to buy back enough coins to stabilize the price. This could cause the collapse of value, especially if people lose their trust in the coin issuer. However, this can also happen to regular legal currencies, not just stablecoins, since currencies are valuable only if others accept it, otherwise, significantly, it will be worth.
The future
Stablecoins could present a solution to short-term volatility, provided that the currency in support of its value remains stable in terms of value. But they will not repair the loss of trust, especially if the value of the reserved resources of the stablecoin is questioned. If the possibility of redeeming this currency is at risk, the price of the stablecoin will probably fall.
Cryptocurrencies based on seigniorage can handle limited volatility if they have sufficient reserves to control supply with algorithmic purchases and sales. But this still requires people to hold or voluntarily accept the currency. Abnormal crashes in flash prices that occur when many cryptocurrencies are sold in a short time are not unheard of, showing the real potential for extreme volatility due to large transactions.
It is also a significant award for the use of stablecoins for the purchase of other cryptocurrencies. At the time of writing, it cost almost $ 118 per unit more to buy a Bitcoin using Tether than US dollars, although both presumably had the same underlying value. If the market saw the stablecoin as a solution to the volatility of cryptocurrency, the price would be the same as with cash.
While stablecoins could reduce the amount of risk that buyers see in cryptocurrency, especially in relation to price volatility, they are unlikely to be used in general.
The use of stablecoin for daily transactions presents many difficulties, especially if the system can not make more coins available if demand increases. Even the Stablecoins are not protected by clearing schemes, some cash bank accounts, making it unlikely that most people will replace their cash accounts.
Regular cryptocurrencies also offer potentially higher returns than stablecoins, which are aimed at those who take risks. The major investment banks are also exploring ways to exploit the volatility of cryptocurrency prices, as this creates more profit opportunities and attracts investors.
This does not mean that stablecoin have no future. People living in countries with unstable local currencies may use stablecoins to hold a more stable foreign currency. However, while stablecoin could be more secure than real currencies in some situations, values will continue to fluctuate if people lose confidence in their value.
Despite the volatile market, cryptocurrencies like Bitcoin remain popular among investors and ordinary people who are hoping to become Bitcoin millionaires. While stablecoins may seem like a sensible alternative, it is unlikely that people will exchange their chances of earning millions for security.
Greig Paul, Chief Security Engineer, University of Strathclyde
This article is republished by The Conversation under a Creative Commons license. Read the original article.
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