Will 2019 be the year of the stablecoin?

3 January, 2019

The 12 months ending on December 31, 2018 were not kind to most major cryptocurrencies. A lot of volume and market capitalization were lost during the year. So with coins like Bitcoin and Bitcoin Cash at the time of this writing looking at a bear market, is there any hope for a return of the bulls in 2019? Possibly, but some are speculating that 2019 will be the year of the stablecoin.

According to CCN, some 120 stablecoins have been introduced over the last 12 months source. Moreover, the total investment in the stablecoin space has now reached about USD $3 billion. A number of investors who turned themselves from average joe's into millionaires by investing in Bitcoin years ago are even getting in on the stablecoin game. Needless to say, there is a lot of interest in stablecoins right now.

What is a stablecoin?

A stablecoin is a cryptocurrency that is backed by some other asset. You could say that stablecoins take the best of blockchain and combine them with the best in tangible assets. The resulting coins are not subject to the same volatility as a pure crypto like Bitcoin.

Consider this: November 2018 was brutal for Bitcoin investors. They saw their beloved coin fall to a sub-$4,000 price in less than a month. Bitcoin rebounded just before Christmas, only to plummet again. As of the time this post was written, Bitcoin was trading at $3,797.29.

When you consider that Bitcoin was once trading at nearly $20,000 per coin, its current price pales by comparison. It is obvious that the amount of volatility in traditional cryptocurrencies is striking. And for some people, it is just too much to bear.

Stablecoins are a lot more attractive to some investors because they are not as volatile. The 'stable' designation in the name is directly related to the assets that back coins up. Stablecoins can be backed up by:

  • fiat currency
  • hard assets like gold and silver
  • other cryptocurrencies
  • other assets creators choose to use.

The stability of a stablecoin is derived from the stability of the asset backing it. Let us say you have a stablecoin backed by the U.S. dollar. Given that the dollar is one of the world's most desired currencies, its value remains relatively stable from week to week, month to month, and quarter to quarter. A stablecoin backed by the dollar would be equally stable.

Why are stablecoins attracting investors?

Perhaps the most curious thing about stablecoins right now is the fact that they are attracting investors. A sizable number of those investors now putting money into stablecoins are doing so after having been burned by more traditional cryptocurrencies. As such, we have seen an interesting swing in crypto investing.

Some of the newest cryptocurrencies on the market have failed in recent years because of a lack of funding. They just did not have a market capitalization to keep going. On the other hand, investors that would have otherwise put money into those failing coins are turning to new stablecoins instead.

At the core of this paradigm shift is the 'pump and dump' strategy that has dominated stock markets for decades. It is a strategy that has been employed in the crypto space in recent years. What is pump and dump?

Pump and dump is a strategy of pumping up an asset - through hype and marketing - in order to get investors to put their money in. Just when it appears as though the asset has peaked, those behind pump and dump pull out and take the profits with them. A resulting price crash leaves investors with little or nothing.

We have seen a rise in this strategy in cryptocurrency over the last three or four years. Indeed, there are now thousands of cryptocurrencies floating around out there. A lot of them were started with the pump and dump mentality in mind. Fortunately for investors, they have caught on. They are less willing to put their money into cryptocurrency platforms and are more favorable toward stablecoins.

Are governments producing stablecoins?

The emergence of stablecoins is no accident. They are partially the result of a small number of national governments dabbling in the cryptocurrency arena. Having seen the power of both crypto and blockchain, government leaders have figured out that eventually transitioning to digital currency is better than continuing to deal with fiat currency.

Canada, the UK, and the U.S. are examples of just three countries working on cryptocurrency projects. Canada has even gone as far as to test theirs in a real-world setting. And in the U.S., the state of Ohio has begun accepting certain kinds of tax payments in crypto.

The consensus among industry experts is that national governments will start introducing their own stablecoins in the near future. Venezuela is the first country to have done so, though there are some concerns as to whether their coin is legitimate. The Venezuelan government says the coin is backed by the nation's oil reserves.

In Japan, a conversation about recognizing cryptocurrency as legal tender is now under way. Elsewhere, governments are looking at how to track cryptocurrency payments for tax purposes. All this government interest points to the same thing: government-backed stablecoins. They are coming, it is just a matter of how long it takes before they arrive.

Does this mean an end to bills and coins?

Let us assume most of the world's most powerful national governments eventually introduce stablecoins. What would that mean to bills and coins? In all likelihood, bills and coins would continue to exist for a limited time. But they will not last forever.

It costs governments absolutely nothing to issue digital currencies. Remember that, like bitcoins, stablecoins are not tangible coins you hold in your pocket. They are simply digits in a computerized ledger. A government could create coins to cover the entire value of the amount of fiat currency it currently has in circulation. Then it could begin to draw in that fiat by replacing it with the alt coins.

Once the transition is complete, that government is no longer spending money on minting coins or printing bills. They are not spending money on transporting those coins and bills the banks. They are not spending money on the labor necessary to recall and destroy used bills and coins so that these can be replaced with new ones.

How quickly bills and coins are eliminated is likely going to depend on the willingness of banks to cooperate. We are talking both central banks and investment banks alike. Central banks are the biggest hurdle, given the fact that they derive their control over national economics by way of their ability to control the money supply.

It is assumed that national governments would give control over their stablecoins to central banks just as they have with fiat currency. But there are no guarantees. Central banks and their investment and retail counterparts are no longer necessary as intermediaries in a world that has no bills and coins. Why? Because coin owners can transact business digitally without the need for a bank in between.

How about a single world currency?

When you take all of this to its logical conclusion, you have to wonder whether we will one day have a single world currency. There are some cryptocurrency purists who believe it is only a matter of time before we do. There are others who suggest that national governments are not likely to risk their own sovereignty by going with a world coin. However in a smaller scale that is exactly what has happened in the European Union / Eurozone, and some other countries around the world that opt to use e.g. USD or EUR rather than make their own.

Let's say one did exist. What would it mean from a practical standpoint? In terms of daily buying and selling, it would be no different than using Bitcoin, Litecoin, etc. You would use the single coin to do everything.

Likewise, you would be paid using the universal coin as well. Your employer would transfer pay to you via your digital wallet, but without having the sender pay through a bank. Your pay would be received nearly instantly, too.

Those who do not think we will ever get to the place of having a single, universal coin offer another scenario. They believe a world coin will exist, but it will only be used for cross-border transactions. The coin would be recognized across the world and accepted by any merchants willing to take it. But merchants would convert those coins into their own national stablecoins at some point.

So where does that leave us?

We have used the occasion of this post to speculate about stablecoins moving forward. But for now, all eyes will be on how they perform in 2019. All indications seem to suggest plenty of interest in stablecoins as an alternative to traditional cryptocurrencies. Bitcoin's volatility is adding to the interest, so we will see where it goes.