In this article, learn how stablecoins developed, what their purpose is, and ut how the stablecoin price outlook post COVID-19 is shaping up.
The purpose of cryptocurrency’s creation was to provide an array of benefits for clients of all sorts. Its goal is to free people from the hardships that come with banking systems. Moreover, it aims to create a brand new financial ecosystem.
One of the most innovative technological advancements in blockchain, the underlying technology of cryptocurrency. It effectively provides the groundwork that’s imperative for establishing a new kind of money in the form of digital currency. Yet, with all the acclaim, it would go through a few years of excessive hype and result in crypto market chaos. Multiple fraudulent projects and suspicious vectors of development would culminate into global acceptance continuing to be out of reach. It was evident that the industry was lacking something incredibly vital.
Over time, it became clear that digital currencies receiving little to no support could not trigger a better technological era. From the failure of ambitious investors’ expectations, there would come a new cryptocurrency asset class: the stablecoin.
Fast forward to the present day and the COVID-19 crisis is presenting a golden opportunity for stablecoins. In these volatile times, they can deliver on the promise of improving financial access and use cases. This is a golden opportunity because governments are trying to quickly deliver stimulus money to large populations in need.
This global economic and health crisis is successfully reviving the popularity and usage of stablecoins. It is also provoking a discussion focusing on digital dollars and central bank digital currencies. Generally speaking, there are roughly six billion smartphones consisting of active mobile subscriptions in the world. Evidently, we are entering an era where accessible stablecoins are capable of reaching a large portion of the world’s population.
A brief overview
‘Stablecoins’ are a revolutionary variation of cryptocurrency that typically peg their overall value to a separate asset. Oftentimes, these coins can be pegged to a variety of fiat currencies. Some of these include the United States dollar, precious metals, other cryptocurrencies, or even a combination of all three. Fiat appears to be one of the most – if not the most – popular options in the marketplace. In fact, one unit of a stablecoin equals out to $1.
The fundamental design of stablecoins allows it to tackle the recurring cryptocurrency volatility that is present in almost all crypto prices. They normally undergo collateralization, which means that assets in reserve back the total number of stablecoins that are in circulation. Basically, if there are 500,000 USD-pegged coins in circulation, then there should be approximately $500,000 inside a bank.
In these trying times, Bitcoin is becoming no stranger to abrupt crashes and sudden gains. The already unpredictable market is now more volatile than ever. Advocates are of the belief that stablecoins will help with the elimination of doubt regarding conversion rates. Perhaps, they will make cryptocurrencies considerably more practical for the purchase of goods and services.
Some notable examples of the most prominent stablecoins include:
- Tether (USDT)
- TrueUSD (TUSD)
- Gemini dollar (GUSD)
- USD coin by Circle and Coinbase (USDC)
The demand for such coins is on the rise, especially in the face of recent events. In fact, back in December of 2018, there were reports claiming that four major stablecoins were bringing in $5 billion. Specifically, in on-chain transactions, and all within the span of three months. In November of that year, they had a 1,032% surge in comparison to how it was two months prior.
How do they work?
The purpose of stablecoins’ inherent design – as their name implies – is to maintain consistency in price or value over time.
Overall, there are three different ways of achieving this: the delivery of a solid medium. Particularly, between offering the stability of fiat currencies and the decentralized benefits that come from virtual currencies. Without stablecoins, taking out a loan while using crypto as collateral has the potential to be incredibly risky. This is because the assets that secure your borrowing can turn out to be worthless within a short time span.
In a similar manner, imagine what receiving your salary in cryptocurrency would be like if prices would suddenly tumble. Realistically speaking, it would be akin to unexpectedly finding out that the price of milk was increasing from $1 to $4. Put simply, your money would go considerably less further.
The three stablecoin types are the following:
- Collateralized by fiat
- Collateralized by crypto
- Ones that are non-collateralized
With all of this in mind, what are the qualities that make up an ideal stablecoin? Well, the perfect financial instrument needs to possess the following qualities:
- It must be convenient as a payment instrument.
- Properly function as a value measure.
- Is able to accumulate value.
- Be capable of withstanding tremendous market volatility.
- Consistently preserve low support costs.
- Provide decent scalability.
- Offer support for privacy and decentralization.
- Maintain enough flexibility to adapt to rapidly changing global and local regulations.
- Provide reliable transparency for trading and arbitrage transactions.
The impact of coronavirus on stablecoin price action and stability
Over the past couple of months, stablecoins have been living up to their reputation and value. We are seeing a gradual transition from traditional crypto assets to stablecoins at levels bearing a striking resemblance to 2018. The market cap of all stablecoins is on quite an impressive increase. It was at $5 billion at the start of the year, but would surpass $8 billion as of last month.
This improvement in the stability and usability of stablecoins effectively prepares them to rise to the occasion. They have the capability to prove their service beyond demand from exchange arbitrage, not to mention its safe haven appeal.
A majority of stablecoins in use nowadays receive backing from fiat currency. However, projects such as MakerDAO and Synthetix are showing that it is possible to build stablecoins pegged to real-world assets. Examples of these assets include USD. Moreover, it’s possible for them to be collateralized by other crypto assets in a decentralized manner by utilizing smart contracts.
Over time, there would be a number of errors and growing pains for both of these systems, including “Black Thursday.” Still, both protocols are able to preserve the price of their stable assets from significant depreciation. Furthermore, they continue to offer empirical evidence that allows you to create a stable value asset in software.
COVID-19 concentrates on the dominating need to quickly transact from anywhere in the world. The task of sending cash transfers with bank transfers and checks at scale tends to be very slow. Not to mention very expensive. Moreover, it makes recipients vulnerable to potential infection as they try depositing or cashing their checks. Direct cash transfers are proving to be helpful for recipients in times of need. That is, so long as their delivery is in a timely manner.
Reason for the popularity
According to Finance Magnates in a recent report, this popularity in stablecoin is a reflection of a widespread movement. Specifically, a transition out of volatile assets and into ones that are comparatively more stable, with one example being USD.
One expert states that the financial crisis in light of the virus outbreak is seeing many investors moving their investments into the USD. By doing this, they hope to successfully reduce the levels of risk. Indications of this trend are occurring in the crypto world. In this field, there are an array of investors moving into USD stablecoins as a measure of risk reduction.
There are a wide variety of benefits that come from making this move in particular. First of all, it gives investors the ability to monitor the markets from the sidelines while pondering their next move. Among stablecoins’ many advantages, they allow investors to hedge their risk. Furthermore, they also provide the ideal tool for reducing the volatility of their investments during chaotic times. One expert makes note of the fact that moving into stablecoins was less costly than moving into USD.
Going beyond that, stablecoin price action is often less volatile than other cyrpto assets. They also provide much more liquidity while also offering all the benefits that come from cryptocurrency. Examples of such benefits include transparency and the strong possibility for cross-border transactions that are both cheap and quick. One expert claims that the crisis we are experiencing is not the first time that stablecoin has seen a boom. Generally speaking, during these times of a noticeable increase in volatility, investors are prone to moving to stablecoins.
Last year was deemed by many to be the year of stablecoins. What’s more, the 2019–2020 timeline has a plan to be a vital turning point for stablecoin ecosystems. This includes a growing amount of worldwide implementation and acceptance.
There’s a possibility that we will eventually witness an array of different experiments before finally achieving acceptance in the market. If nothing else, spending on blockchain solutions will definitely continue to grow. According to a report from Statista, in 2022, U.S. spending on blockchain solutions will probably reach about $4.2 billion. This, in turn, will make it the largest regional spender on solutions of this kind.
When you compare it to more traditional crypto, stablecoins’ volatility is considerably much lower. This is mostly because the price is heavily dependent on the overall rate of the real asset. As a result, this creates new opportunities. Not just in the development of the cryptocurrency industry, but digital assets as a whole.
Be that as it may, existing stablecoins have their fair share of drawbacks. These shortcomings are the reason for the failure of convincing market adopters that it is the future of the market. Constructing a product that is capable of conquering a market race that is full of relentless competition among hundreds of pre-existing projects is a difficult task.
The ultimate trend
The concept of stablecoins is representative of a mixture consisting of the best cryptocurrency features and the ones fiat possess. Together, they create a killer combination. That being on-demand accessibility and irreversible transactions with consistent and comprehensible value connecting to a conventional currency that everybody recognizes. These days, it is becoming quite clear that long-term perspectives on such assets are tremendous.
Put simply, stablecoins are an innovative concept in the world of crypto. They do not represent a trend, but instead the next evolutionary step for the finance industry at large. As such, the stablecoin price outlook appears to hold promise.
For that matter, during the pandemic, interest in digital currencies is seeing an increase. It is essentially boosting the industry’s progress, with the demand for a digital dollar and a digital euro rising dramatically. Moreover, it would result in considerable growth in the use of financial technology applications in the working world. This is mainly due to more and more workers needing to work online.
Digital money, as a whole, is safe to use to provide remote payments. Once upon a time, this was a quality that no one would interpret as more than just a convenience. With that in mind, stablecoins are an ideal tool that we can take out of this particular box.
Nowadays, digital currencies are going beyond simply being a trendy and geeky concept. Many see them as a safer alternative for performing financial operations. What’s more, they provide a new layer for the foundation of the financial system of the future.