Stablecoin vs General Cryptocurrency

By Nagaya Technologies on The Capital

If you have been following the Cryptocurrency market for a while, you would have noticed a new type of Cryptocurrency called a Stablecoin.

What is it, and can it disrupt the Cryptocurrency atmosphere?

Today, let us discuss this new payment method, what are its features, how does it compare to a General Cryptocurrency and whether it is worth the money you are thinking of putting into.

What is a Stablecoin?

If you are buying a loaf of bread for $9 today, what are the possibilities that tomorrow the price triples?

Unless the economy is going through hyper-inflation like what is going on in Venezuela, it is least likely going to happen.

Cryptocurrency was created to fulfill people’s needs for a new payment method that is not controlled by a central authority. That way, the power is given by the people, to the people.

But if you have been either an investor or an observer in the Cryptocurrency market for a while, you will notice that they are extremely volatile.

For example, in three-month from October of 2017 to January of 2018, the volatility of the price of Bitcoin reached nearly 8%. This is more than twice the volatility of Bitcoin in 30 days ending January 15, 2020. (Investopedia)

This is disastrous for any business owners thinking of accepting Cryptocurrency as a payment method. Imagine if you own a bakery and see one single token’s purchasing power go from buying just one loaf to three loaves of bread in one single day.

In fact, it happened. On May 22, 2010, a man by the name Laszlo Hanyecz agreed to pay 10,000 Bitcoins for two delivered Papa John’s pizzas.

Today, those two pizzas are worth somewhere around $80 Million.

This is where Stablecoins come into the picture.

A Stablecoin is a Cryptocurrency that is backed by a “Stable” asset or a basket of an asset. In this type of Cryptocurrency, an asset is chosen to peg or hedge the Cryptocurrency, so its price remains stable. Think collateral in the case its price drops.

There are several kinds of Assets that have been used to back a Stablecoin, some of which include Fiat Currency, Commodities (Gold, Silver or Oil), another Cryptocurrency, or a combination of them.

Stablecoins as compared to General Cryptocurrency

Stablecoins have some advantages and drawbacks as compared to a General Cryptocurrency.

Stablecoins provide the benefits of a General Cryptocurrency without the sacrifice of the heavy price movement it involves. This is exceptionally well for businesses thinking to accept this form of digital currency into their everyday transactions.

Their Immunity to massive price fluctuations and their peer-to-peer technology is also ideal to boost remittance services. International money transfers can be made easier, faster, and cheaper with no intermediaries needed. They also support smaller transactions including Trading, Online businesses, and small money transfers.

Their drawbacks as compared to General Cryptocurrencies, however, lies in their strength. Price Stability is a turn-off when it comes to investing, and investors are better off holding the assets that back them up as compared to the Stablecoins.

Moreover, Stablecoins are usually monitored by a central authority that ensures the price remains stable. This is against the entire idea of Cryptocurrencies being bringing the power back to the people.

Before you put money into any Stablecoin, there are certain factors determine whether they are worth considering:

Asset Type

Unlike Cryptocurrencies which move solely due to market sentiments, the advantages of a Stablecoin is its stability because they are hedged against a stable asset.

But are they?

The most widely used assets as a Hedge are physical assets (Fiat Currency or Commodity).

What about Digital Assets? Another Cryptocurrency, maybe?

They do not fulfill the characteristic of an ideal hedge, which should be protecting the asset “insured” against potential risks of heavy price movements. An ideal hedge should have a stable value, and cryptocurrencies are very volatile.

Transparency

In the case of a Stablecoin, usually, there is a central authority ensuring the price remains stable.

The next question is, how transparent are they?

Are they willing to be audited by a credible third party? Are they willing to release the audit report on their website?

There is a Stablecoin that is extremely popular in the market. This company claims that their Stablecoin is backed on a 1:1 Ratio with the US Dollar, which means that 1 token is worth $1.

Despite their massive Market Capitalization, people are starting to lose their trust in the Company’s claims because they fail to provide a promised audit report. And due to that, their price decreased to lows of $0.90 on 15 October 2018 on speculation that investors were losing faith in the token.

Until today, nobody is sure if the Company is keeping their word and investigations are still ongoing.

Valuation

Let us say a Stablecoin is backed against property/land.

If you decide to give up your coin, will you get the actual portion of land promised? How are they planning to divide the land? How will they value it?

The same goes for Gold, Oil, or Digital Assets. Always be sure of your assets and any worst-case scenarios before buying them.

Legality

The presence of a Central Authority in ensuring the stability of a Stablecoins brings them to a sweet spot between Cryptocurrency and… Fiat money.

Their technology is revolutionary, but their management process is practically the same with the current financial system which we agree is flawed; the presence of a central authority determining the fate of the Cryptocurrency.

What if you’re already using a Stablecoin for transactional purposes and… the company goes missing? Or files for bankruptcy?

The “Stablecoin” you’re holding would lose their value, wouldn’t they?

Yes, this may happen to a FIAT Currency too, but they are backed by official authorities (i.e. the government) and has an exceedingly small chance of disappearing or files for bankruptcy. When it comes to a “Stablecoin,” we must remember they are moderated by a private entity.

So be sure to check their legality. Questions like where are they registered, are they officially recognized by related authorities, and whether they are audited by a credible third-party institution are important factors.

Does it make sense?

As we have understood, a stablecoin is a Cryptocurrency pegged against an asset.

One of the reasons people invest in a Stablecoin is the hope that the price of the asset will rise.

If that is indeed your considering point, ask yourself if it makes more sense for you to buy Stablecoin or the asset itself.

Stablecoins come as a solution to the current gap General Cryptocurrency has, price stability. This factor is huge in determining whether Cryptocurrencies can ever be used as a transaction method, as current market adoption is far from ideal. Remember that the majority of a Stablecoin is managed by a Central Authority, which makes it like a Fiat Currency.

If you are a Trader, Stablecoins can be a solution for you. But if your goal is to invest, you are better off spotting a good General Cryptocurrency and HODL. More on that here!

Like this story? Please share and recommend to others.

Follow us at https://nagaya.co/