Cryptocurrency markets have been accelerating for more than a year. Even after a sharp downturn in January, crypto markets are still up almost $400 billion from this point last year. What started as a niche experiment in 2009 with the launch of Bitcoin, exploded into a dynamic marketplace comprised of hundreds of digital currencies that, at their peak, established a market cap of more than $800 billion.
In fact, cryptocurrencies have been so successful that they’ve attracted attention from mainstream financial institutions. Investment juggernaut Goldman Sachs now runs a cryptocurrency trading desk, CBOE Group and CME Group both launched Bitcoin futures contracts in December, and even prized crypto skeptic, JP Morgan Chase CEO Jamie Dimon, seems to be coming around.
However, despite their tremendous growth and increasing acceptance in the mainstream marketplace, people remain skeptical about cryptocurrencies. Some of this is unfounded and fueled by ignorance, but some of it is entirely legitimate. Most notably, the intense volatility of crypto markets seems to be undermining investor and consumer confidence in cryptocurrencies as an investment vehicle and as a digital currency.
Those concerns are not unfounded.
Crypto Assets Are More Volatile Than Traditional Investments
In 2017, Bitcoin dropped by more than 70% on five different occasions. This extreme value depreciation is, in many ways, representative of the entire cryptocurrency market. Sudden and significant price drops are so frequent in crypto markets that they have a name, “flash crashes.”
Just before Christmas, crypto markets endured an inexplicable flash crash when the entire market dropped by almost 30% in only a few hours. Even more surprisingly, by the end of the day the market had mostly recovered, and by the end of the month, they were up nearly 25% from their pre-plunge levels.
This type of volatility is exciting, but it certainly doesn’t elicit confidence from investors.
The solution so far has been the release of stable coins, a specific type of cryptocurrency that is intended to stabilize crypto markets by making the digital currency’s value more correlated to standard metrics rather than rampant market speculation.
Stable Coins Represent a Fix
While crypto markets are erratic, stable coins are, as their name indicates, stable.
That’s why it was damaging when Tether, a cryptocurrency that claims to be “tethered” to hard currency held in a bank, fell into disrepute.
In their Proof of Funds report, Tether contends, “Each Tether token is backed 100% by fiat currency in Tether Limited’s reserve bank account.”
However, this claim is being cast into question because of Tether’s questionable behavior this year. First, Tether refuses to publicly disclose their account holdings, which makes it impossible to verify their claim. In addition, Tether fired its independent auditor citing an elongated auditing period as the reason for the change. Their primary U.S. bank, Wells Fargo, no longer supports Tether as a client. Astonishingly, in January Bloomberg reported that Tether was served with a subpoena by the U.S. Commodity Futures Trading Commission.
This is undoubtedly bad for Tether, but it’s terrible for crypto markets as well. Stable coins represent an effective way to purchase other cryptocurrencies, but they are also a way to use cryptocurrencies practically.
For example, cryptocurrency users are unlikely to use a highly volatile digital currency to make a purchase. After all, nobody wants to be the next Laszlo Hanyecz, the unfortunate Bitcoin holder who spent 10,000 Bitcoins on two pizzas in 2010. With those Bitcoins now worth more than $100 million, the lesson is clear: don’t spend a volatile resource on a consumable item.
One Bad Apple Doesn’t Ruin the Bunch
Fortunately, there are other options available. Kowala, a U.S. based cryptocurrency, offers a stable coin that is digitally pegged to the U.S. dollar. Using real-time market data, Kowala’s kUSD token’s value fluctuates with the price of the U.S. dollar, which makes it uniquely adept at purchasing other cryptocurrencies or making real-world digital purchases.
Since its metrics are digital, kUSD holders can self-regulate its authenticity, so it isn’t vulnerable to the integrity issues that have plagued Tether, without any asset backing needed to assure its stability.
Other stable coins including BitShares, Maker, Havven, and Augmint use collateral, typically a decentralized digital asset, to support their platform. For example, Maker’s digital currency is backed by Ether. While these digital assets are not as stable as a U.S. dollar, they still represent a tangible an important part of the solution.
Stable coins are important for crypto markets. As cryptocurrencies continue to proliferate, their volatility has not evened out. To function smoothly and to enact their original intention, to facilitate digital p2p transactions, they require a stable currency to facilitate those transactions. While crypto market fluctuations drive headlines, stable coins create usability, which is ultimately far more important.