2018 was a tough year for everyone in crypto – the bear market took away a good chunk from the crypto portfolio and many coins lost more than 90% of their initial value.

Nobody likes to lose money, which is why stablecoins recently surged in popularity. A lot of new stablecoins were issued, with a lot more to come, and it’s possible that 2019 will be the year of stablecoins. Stablecoins allow people to escape the instability of the market to the safety of asset-backed cryptocurrencies.

But there’s a problem with stablecoins: many of them are backed by the dollar, and we are possibly standing on the verge of another great recession and major economic downturn. Nobody knows what will happen in 2019. Is it safe to rely on fiat-backed stablecoins? Read on if you want to know!

Stablecoins: the pros and cons

All stablecoins can be divided into three categories:

Fiat-backed stablecoins – The most common collateral here is USD and each token (usually it’s a ERC20 token) is backed with 1 currency unit, stored in the bank accounts of the issuer. Distributed stablecoins – These tokens aim to achieve the stability of the US dollar by mathematical algorithms, using collateral stored in the system and keeping enough physical assets to back all issued stablecoins. Stablecoins backed by precious metals – Each token is collateralized by a specific amount of gold or silver.

The first stablecoin was launched in July 2014 on the BitShares platform. It was called BitUSD and collateralized by pools of the platform’s native cryptocurrency, called BitShares, so it can be classified as a stablecoin. It didn’t become popular and the algorithm for price pegging was weak – based only on the assumption that market participants would buy and sell all tokens below and above the $1 price until it reaches the peg.

The next one was Tether. Tether was issued on October 6, 2014, and was initially named “Realcoin”, before officially announcing the rebrand as ‘Tether’ when it opened for private beta. It was assumed that every USDT token is backed by one dollar. However, in April 2017 Tether was cut off from all its banking services by Wells Fargo, and since then there has been no clear evidence that its funds are backed by anything. Until that date, it was unknown where its funds were stored and no audit was provided. Since then, it has issued 2 billion new USDT tokens and only in October had they found a new banking partner, Deltec Bank. So it’s again about trust, not about transparency.

The more recent examples of stablecoins issued in 2018 include Gemini USD (GUSD), TrueUSD (TUSD), and USDC (a stablecoin by Circle). All of them are backed by audited funds, thus investors can be sure that all tokens will maintain their peg and be fully redeemed upon request. There is only one problem: are they more stable than the US dollar that backs them, and what will happen if the fiat system became unstable?

Fiat problems

The US dollar has been considered a stable currency for decades. The US controls the world’s reserve currency, the dollar, that is used in 51.9% of all international trades, essentially backing up the whole world’s economy. The US economy is the strongest one with the highest GDP of $19.5 trillion in 2017.

When anyone needs dollars for trading, the US can print more of them. That’s why they can grow the government debt by issuing new treasury bonds – and everyone is happy to buy them. Furthermore, investors have abandoned the stock market in favor of US bonds after the recent rate increase. So, whatever happens, the US dollar is protected more than any other commodity in almost all cases. Except for one.

The debt that started growing in 1970s, and exceeded $21 trillion in 2018, is a very worrisome state of affairs. It’s nearly equal to the USA’s annual GDP, and it continues to grow by $1 trillion every year. Experts don’t think it will ever be paid off. The government isn’t ready to slow down economic growth in favor of paying off debts. But the economy is already showing signs of slowing down. The markets are also tumbling down. There are chances that this will evolve into a terrible recession, and it’s even possible that the next crisis will happen in 2019. Sooner or later, the US will have to deal will their enormous debt. What will be the consequences and what impact will it have on fiat and fiat-backed stablecoins? No one knows, simply because there is too much uncertainty around the subject.

There are two chain of events that could happen:

There will be a strong recession with falling stocks and failing crypto portfolios. Bitcoin and stocks are heavily correlated , so when stocks begin to crash, Bitcoin and other cryptocurrencies also won’t do great , because investors pull out money from risky assets. It’s not that easy to pull money out of crypto: you have to wait a few days, even if your exchange supports wire transfers (and many exchanges don’t even support it). This leaves you with two options: stay in crypto assets or move your capital to stablecoins. Everything stable will thrive in this case, including the dollar-backed stablecoins. Or.. after a long recession the US won’t be able to handle its debt and will experience a debt crisis. That’s the situation when all financial instruments will see a major downturn and fiat-backed stablecoins will also be in trouble. In this case, precious metals will become a safe haven for many investors. Where do you keep your assets if all currencies are on the decline? In gold and silver (maybe even in platinum and palladium). In this case, only the stablecoins collateralized by precious metals can be considered stable .

Gold-backed stablecoins

Stablecoins and other products that are backed by precious metals can become quite popular in 2019. In the coming years, the volatility of the markets will be increasing, and even if we won’t see the crisis this next year, the growth of the world economy will be decreasing, for investors to move their capital to more stable assets, such as gold and silver.

However, if you’re an institutional investor, you can afford put a few millions or even billions into gold and not care about your money, because you won’t be needing it in the near future. If you’re a retail investor, you would certainly like it if there was an option to place your money into gold, but you’d also want to use it at the same time. If you buy gold/silver bullions, they are stored in vaults – you own them, but you can’t use them on a daily basis. The same goes with gold/silver ETFs. But there’s a different story with stablecoins, because they are far more advanced compared to older financial instruments thanks to the blockchain technology that powers them. There’s no problem with keeping track of tokens/coins stored in your wallet and keeping track of the bullions of precious metals that back them at the same time.

Previously, there was no way to issue currency representing precious metals and make purchases with it, because all governments abandoned the gold standard in the middle of the 20th century. Governments can’t issue such currencies anymore, because it won’t allow them to maintain an inflation-based economy. Small organizations weren’t able to issue such currency, because it was almost impossible in the pre-blockchain age for a non-institutional organization to build a large infrastructure, issue a currency, perform regular audits, publish the results of audits, etc. Now the blockchain allows users to do all of this with ease, and all data is easy accessible and verifiable.

We’ve analyzed the projects that are being developed in the place, and these are the ones that we are considering to be the strongest:

Tiberius Coin (TCX) – It’s backed by a mix of various metals, including gold, platinum, tin, nickel, cobalt, aluminium, and copper. Thus every token represents a pretty diversified portfolio. However, it’s probable that it won’t protect its owner from a market crash as well as a purely gold-based one.

Kinesis – Two currencies based on gold and silver. KAU (gold) and KAG (silver) are backed by bullions stored in vaults at a 1:1 ratio. The most interesting features of this project are that you can spend it with ease, using a special crypto card, and receive dividends for storing and spending – all holders get a small percentage of the transactions fees processed in the Kinesis network. It may be an interesting financial instrument to keep your money in, because it offers the flexibility of regular fiat money while at the same time being a stable asset that can protect the capital of its owner from a severe drop in the stock market.

Digix – Instead of giving dividends, it takes fees for storing gold – an annual 0.60% fee and 0.13% for transactions. Every 100 tokens are backed by a gold bar. It’s an old project, founded in 2014, and the fact that it still works and its developers continue to improve it shows its stability. Sadly, it doesn’t allow for the use DGX tokens to pay for purchases, in contrast to Kinesis.

We’ve created an infographic to better explain this idea to you:

Conclusion

Why is there so much buzz around stablecoins? Because people fear constant market crashes. Because people want to have a small island of safety in the unregulated ocean of crypto where they can place their feet in at anytime.

Stablecoins can become the next big thing. Huobi and OKEx listed new stablecoins and Circle’s USDC was even added to Coinbase, the largest licensed exchange in the US. There’s a lot more to come in the future, too – the London Block Exchange is set to launch a pound-backed stablecoin, LBXPeg, the largest telecom company in Mongolia will issue a regulator-approved Candy stablecoin, and Stronghold (a financial company) also plans to issue its own stablecoin.

Binance recently listed two new stablecoins and its CEO wrote, “Regulated stable coins serve as a middle ground where regulators maintain control, but the token also offers far more freedom than traditional fiat for users.” Not everyone on crypto markets are there for decentralization, some people regard it as a usual market where they can trade – and they are happy to see that they can sleep at night by keeping money in some assets.

Stablecoins will provide the features of blockchain networks – transparency and speed coupled with trust, because they have something backing them in case they fail. In these times of uncertainty, that is a trait that will be highly valued.

Thanks to the Howtotoken Agency experts for the information and comments provided for this topic.

All materials on this site are for informational purposes only. None of the material should be interpreted as investment advice.