Do We Need Stablecoins? <Revised September 2nd, 2018>

Sung Kim
Sung Kim
Sep 4, 2018 · 3 min read

Do we need stablecoins? That’s the question that I posted in my May 2018 article and answered as “only in limited use cases”. After feedback from multiple parties, reading other peoples’ writing and upon further reflection, I’ve changed my mind. I’m willing to admit that I’m wrong, especially if it helps me to become more right.

There has been some great writing on stablecoins and almost everyone’s favorite is Haseeb Qureshi’s piece “Stablecoins: designing a price-stable cryptocurrency”. There’s been additional great writing on this subject matter but most appeal to us stablecoin uber nerds. Folks that actually read whitepapers and seek to understand seignorage algorithms. This article seeks to expound on something else: who the heck actually uses stablecoins?

First, what the heck is a stablecoin? In my own words, a stablecoin is a cryptocurrency that attempts to peg or fix a price to an external asset or currency. The most popular stablecoin is currently Tether, which pegs to $1USD. Most stablecoins have similar pegs to EUR, JPY, CNY, or fixed assets such as gold or silver. Some hope to eventually peg to some sort of CPI basket to protect against inflation.

To analyze who uses stablecoins, it’s valuable to look at the most popular stablecoins and extrapolate from there. Tether dwarfs all stablecoins with a market cap of $2.8 billion USD and daily trading volume of $3 billion USD. Most people are not holding Tether but use it as a USD fiat proxy when trading on exchanges. The reasons for not holding Tether are numerous and well documented. True USD has a market cap of $73 million USD and daily trading volume of $11 million USD and growing rapidly. My guess is that the “smart money” is using True USD as a fiat trading proxy and even parking assets in the stablecoin due to stronger safeguards.

From there on, the stablecoin market is extremely fragmented. Although Dai has a $48 million USD market cap, only $1 million is traded on a daily basis. So the first category of stablecoin users are traders seeking a fiat currency proxy.

The next category of users is harder to quantify and it is those that seek to circumvent their country’s capital controls. I live in the United States and have access to free flow of capital in and out of the country. This is not the case in all countries. For example, China has extremely strict controls on money leaving the country. And this is the second largest economy in the world! Interestingly, bitCNY has a larger market cap of $22 million USD vs bitUSD of $11 million USD. If I lived and conducted business in China, the ability to use a CNY denominated stablecoin that can cross borders would be extremely desireable.

And the last category of users are those that live in a country with unstable fiat currency. Think massive hyper-inflation and loss of purchasing power. This last characteristic is often accompanied with capital controls and a current example is Zimbabwe. Leading the pack for highest estimated inflation in 2018 at 1,000,000% is… Venezuela! Venezuelans are quickly adopting cryptocurrencies over their native currency.

So to sum up, the largest users of stablecoins are currently:

  1. Traders
  2. Citizens that live in a country with strict capital controls
  3. Citizens that live in a country with an unstable fiat currency
  4. People that experience conditions #2 and #3

Disclosure: I am a member of senior management of Xank. Xank is a free floating cryptocurrency that incorporates stablecoin characteristics on demand. For more information, please go to xank.io.

Data Driven Investor

from confusion to clarity, not insanity

Sung Kim

Written by

Sung Kim

Enjoy uncertainty.

Data Driven Investor

from confusion to clarity, not insanity

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