Necessary Evil (FUD) About “Stable” Coins
Before I get into this post, I want to reiterate Andreas Antonopoulos’ thoughts on pegged cryptocurrencies.
Think of them as rubber bands. If the market wants to move and the stable coin is resisting it, it will snap.
l take a look at one stable coin at the end of this post that demonstrates just this.
To view this information in video format (and get a little glimpse of S.E. Asia) Check out this link: https://youtu.be/EfWxj6Ni4b4
What’s interesting to see with these stable coins is the fact that they are fundamentally different from other cryptocurrencies who’s goal isn’t necessarily to be the most stable coin, but instead to be a coin that increases in value over time.
It’s for this reason I believe that we are seeing many more similarities between stable coins and traditional fiat currencies. Since we’ve seen many of these fiat currencies fail over time, the methods used to achieve this stability ought to be thoroughly vetted before being considered by anyone as a guaranteed hedge against volatility.
You better believe if a stable coin fails, it’s near impossible for it to regain the confidence needed to be stable again.
Mostly, these stable coins work to maintain a constant price by analyzing the market and adjusting their supply.
- When demand for their coin increases, they create more so their price doesn’t skyrocket.
- As demand wanes, they destroy coins to ensure scarcity works to support the value.
Speaking of stable coins that use methods resembling practices of fiat currencies, first we’ve got Tether, I know this one is well known but I’ve still gotta mention it for those who are looking for options.
Tether has been providing people with a stable cryptocurrency option for over 3 years now. So it has that going for it, but when it comes to considering where to move your investments especially if you’re trying to hedge against volatility in the crypto markets, it’s important to know that this one has been surrounded by rumors for some time now.
Here’s the deal: The supply of Tether coins is supposedly backed one to one with USD. Which sounds great, if only this could be proven. They’ve had audits conducted but they are always conducted by slightly inappropriate entities which end up publishing press releases that end up dancing around any kind of definitive proof that the actual USD reserves exist.
All that sounds a but opaque, and I haven’t even mentioned the suspicious relationship between this one and the exchange Bitfinex. If you’re interested in learning more about that one, it’s something worth looking into, I’ll post some links down below.
Now let’s take a look at other attempts at stable cryptocurrency options and their creative ways for achieving this price stability.
Instead of having to trust that each DAI coin is in fact backed by an asset owned by the company,* you* participate by offering up your own collateral in the form of other cryptocurrencies, like Ether.
The issue here is the utter volatility of other cryptocurrencies can very well weaken this faith in the DAI’s stability.
Not every stable coin created has been able to maintain this constant price.
Understanding why some of these attempts have failed is really important to know because how better to learn than from past mistakes?
In this world of cryptocurrency we are met with what seems like an infinite number of new coins to look into each day. Most of these don’t have original ideas or approaches, and will instead try similar schemes to become profitable.
Learning from those which have failed will prove to be an invaluable tool for you to use when analyzing new coins.
BitUSD for example is pegged by using other BitAssets as collateral.
As of today, BitUSD is maintaining a somewhat steady price. This year it’s bounced around from $0.96 to the $1.17 range, but in it’s 4 year lifetime BitUSD has seen a low of $0.75 and a high of $1.36.
This doesn’t exactly qualify as a solidly pegged crypto in my mind, but the fact that it has maintained this range for so long and has not crashed to zero, especially after that all time low of $0.75 is a bit impressive.
If nothing else, this could be a pretty lucrative arbitrage situation.
Much like I mentioned about MakerDAO, this begs the question, what happens when the collateral falls in value?
What makes BitUSD different is that it is completely reliant on Bitshares assets. This is just one example of the Bitshares ecosystem that Dan Larimer created and how it’s designed, but this type of centralized self-reliance could prove detrimental if one asset crashes, it could bring the whole thing down. (That’s assuming that the whales don’t step in and support the market.)
Lastly, let’s take a look at a stable coin that perfectly emulates the reference to Andreas Antonopoulos I made at the beginning of this video: NuBits.
This one held a pretty stable $1.00 peg for a year and then in just over one week in June of 2016, tumbled from $0.95 to $0.16.
After that capitulation it’s price was far less stable and since March of this year, it’s been in a pretty steady decline.
Consider this, investors who are interested in stable coins, not specifically for making purchases, but for hedging against negative market volatility, are very likely to sell their stable coins when the market begins to move heavily into the positive. This leaves stable coins like NuBits to scramble with this excess dumping and ultimately leads to a decrease in price, with that is the inevitable decrease in faith. The latter being a much more difficult thing to regain.
Stable coins explained
Tether (USDT) Charts
Tether and its Auditors
Examining Tethers Audit
Tether & Bitfinex relationship
MakerDAO Stable coin (DAI) Chart
BitUSD pegging mechanism explained