One of the principal reasons holding back the adoption of cryptocurrencies is their volatility. The extremely turbulent crypto value which changes significantly on a daily basis makes it difficult for the buyers and sellers to use cryptocurrencies as an exchange medium. In the backdrop of this volatile nature, another kind of digital currency, stablecoins is gaining popularity among the masses. In recent years, the stablecoins have consistently climbed the ladder of popularity thanks to their relatively stable value which is pegged to some kind of traditional currency such as US Dollar. This stability aspect makes it quite handy for the transacting partners to exchange the value; however, stablecoins have their share of issues with the primary one focused on their reliability.
The rising popularity of stablecoins can be testified with the fact that their total market capitalization had now reached $3 billion from $1.4 billion a year ago. This translates into a more than the double increase in the market cap which is quite astonishing by any standards of comparison. This data was published by the Blockchain firm which deals in offering crypto wallets for the digital currencies.
It is a known fact that cryptocurrencies are hardly used for purchasing any kind of product or services because of their tendency to fluctuate wildly, depending upon market sentiments and speculations. Take, for instance, the case of Bitcoin – the largest cryptocurrency in terms of market capitalization. The prices of Bitcoin towards the end of 2017 were close to $20,000 which was a 15-time increase in its value; however, in the year 2018, the value of Bitcoin plummeted more than 80% leading to the crash in the values of other cryptocurrencies too. Therefore, it becomes quite difficult to deal in cryptocurrencies as no one knows where they will head the very next day.
This scenario could potentially change thanks to the invention of stablecoins which according to Garrick Hileman, Blockchain’s head researcher, are the real problem solver. Echoing the sentiments is Tom Shaughnessy, the co-founder of Delphi Digital, a cryptocurrency consultancy firm which says that the reduction in the volatility will lead to spur the confidence and allow the customers to make use of crypto for their daily purchases or buying the simple things like having a cup of coffee with crypto.
Signaling the rising popularity of the stablecoins is the recent unveiling of a digital coin by the banking major JP Morgan. Called JPM Coin, the digital currency is based on the concept of blockchain and touted to be a revolutionary step towards making the digital currency a mainstay technology in the banking industry. As of now, a total of 26 stablecoins are operating in the market while the other 28 (excluding the JPM Coin) are under the development phase. According to the study by Blockchain, most of the coins under the development are expected to launch this year only.
The current market leader in the stablecoin category is the tether whose value is always pegged at $1. Its credentials are impressive as it makes for more than 95% of the trading in the category of non-volatile cryptocurrencies and represents more than 69% of the trade value. In terms of daily trading volume, the tether is second only to Bitcoin and in terms of market capitalization (including the volatile cryptocurrencies), it comes at a seventh place, data from Coinmarketcap reveals.
Many experts including the Hileman of Blockchain believe that stablecoins shouldn’t be seen as a competitor to cryptocurrencies. Rather this relationship should be looked at as a complementary bonding. The cryptocurrency like Bitcoin should be used to store the value and considered as a digital gold while stablecoins should be primarily considered as a mean to facilitate the exchange process.
Like the cryptocurrencies, stablecoins have also their share of issues. For example, Tether has failed to allay the fears of investors about the allegations leveled it of manipulating prices. Many experts and industry analysts have the suspicion that the issuer of the tether, Bitfinex exchange has circulated more tethers in the market than the dollars it raised in the exchange process. The suspicion is further fuelled by the fact that despite repeated requests, Bitfinex never published the accounts which is kind of a strange thing to do for any kind of organization. Moreover, a study conducted by the University of Texas in June last year found that any decline in the prices of Bitcoin led to its huge buying with tether stablecoin which ultimately helped the Bitcoin to stabilize. The study implied that Bitfinex and its related entities were behind this move although Bitfinex has denied all such allegations.
Despite having a number of advantages, experts are concerned about two major issues with the stablecoins – first, the reliability concerns regarding the issuing authority and second, the centralized nature of stablecoins. We have yet to witness any kind of a stablecoin project which can address both of these issues by providing a stable, secure, and universally acceptable solution while having decentralized character of the cryptocurrency.