A new era of the cryptocurrency market. Institutionalization
During all the previous eras of the crypto industry development, there has always been a certain driving force. At the rise of the crypto market, Bitcoin was treated as this driving force. Later on, altcoins appeared. The third era of the cryptocurrency market was marked by strengthening of utilitarian tokens and decentralized platforms.
The driving force of a new era
During a new era of the cryptocurrency industry development, traditional financial institutions are to become the main driving force. Of course, we are talking about banks. Moreover, there is a possibility that even more influential players — the leading states’ central banks — will join the crypto market. Advent of these players will contribute to a new stage of the crypto market development and availability of large investments. However, they are likely to bend every effort to turn the cryptocurrency market into a traditional financial system.
One of the key features of a new era is rising assertiveness of traditional financial instruments — stablecoins, in particular. That is why the fourth era of the crypto industry development can be duly called institutionalization.
Stablecoins
Stablecoins are a hybrid type of crypto assets that has been developed to maintain its stable value. This is the key difference between stablecoins and the “natural” crypto assets that have always been characterized by hyper-volatility.
Stablecoins are nothing new for experienced players of the crypto market. As early as at the beginning of last year, there simultaneously existed 5 stablecoin projects. Moreover, the first full-fledged stablecoin appeared as far back as in 2015. And its introduction was already discussed at the rise of the crypto industry development in 2012.
As of today, the most famous stablecoin project is Tether. This crypto asset’s price is tightly pegged against the US dollar. This project was developed by a cryptocurrency trading platform Bitfinex.
Within the first 9 months of last year, about 30 new stablecoin projects were created, with majority of the introduced projects being able to attract quite a substantial amount of investments. For example, the Basis project managed to raise more than 133 million US dollars. Such projects as Terra Money (32 million) and SAGA (30 million) reached substantial sums as well. It’s worth mentioning as wellthat many projects have been developed by reliable cryptocurrency exchanges (including Tether) and liquidity providers. Thus, the Circle Company has developed USDC, Gemini — the Gemini Dollar stablecoin, the Paxos Company (the former cryptocurrency exchange ItBit) is responsible for Paxos Standart.
Stablecoin varieties
Allstablecoins can be figuratively divided into 4 categories:
• Asset-backed. In this case, each token is backed by precious metals, fiat currency and other physical assets. Tether, Alprockz, and TrueUSD are examples of this stablecoin type.
• Cryptocurrency-backed. This type of stablecoins is backed by a stronger and consequently, stable cryptocurrency asset with a liquidation premium. This type can be exemplified by Haaven and MakerDAO.
• With a supply adjusting mechanism. This stablecoin type implies an algorithm that is responsible for monitoring a stable level of the token price. This adjusting mechanism is similar to the policy of central banks regarding fiat currencies. These stablecoins include such projects as Kowala, Carbon and Basis.
• Hybrid. This stablecoin type is based on a combination of two or more abovementioned models. For example, the Saga project combines characteristics of the real asset-backed tokens and have a supply adjusting mechanism similar to the redundancy mechanism used by central banks.
The role of stablecoins
But still, what is the role of stablecoins a new era of the cryptocurrency market development? First of all, it is worth mentioning that introduction of stablecoins contributed to improvement of transition process from the fiat currency industry to the cryptocurrency market. This enabled the crypto market leading players gained additional opportunities for liquidity provision. Moreover, stablecoins contributed to easier crypto exchange clearings. Another advantage of stablecoins introduction is minimization of opportunities for exchanges to perform illegal operations. This made it possible to convince regulatory authorities of the necessity to establish a crypto-ETF fund.
Majority of the cryptocurrency market participants pay attention only to superficial consequences of stablecoins influence on the crypto industry. However, there are deeper consequences. Thus, stablecoins integration into the cryptocurrency market eco-system contributed to the introduction of a private crypto-fiat currency in the crypto industry.
The stablecoins price is maintained at a stable level due to the fact that they are pegged against a real fiat currency. Despite the fact that during a bearish trend on the cryptocurrency market, inflation can become an advantage, stablecoins are subject to a negative impact of this economic phenomenon just like all traditional fiat currencies.
Stablecoins integration provides a unique tool for managing the crypto markets at the state level. Given that the state has no opportunity to control Bitcoin and majority of other cryptocurrencies, stablecoins make it possible for it to use an alternative solution. Due to tokenization and advantages of applying digital technologies, the state can use an alternative to Bitcoin, while retaining an opportunity to perform centralized control over stablecoins. Moreover, introduction of this crypto asset makes it possible to establish a private sector that enables to veil the government intervention to the free market.
Despite the fact that stablecoin keeps strengthening its position, Bitcoin still remains a rather important value on the crypto market. The reason for this is that the real requirement of Bitcoin, as well as of a government regulation-resistant, is as high as ever.
Introduction of stablecoins has become a significant step towards implementation of crypto assets that will be regulated by government authorities. This direction of the crypto market development can have both positive and negative consequences, which we will discover after the institutionalization era comes to its end.
Positive and negative consequences
In general, entry of gigantic institutions (large banks, investment funds, central banks) into thecryptocurrency market may indicate that it is becoming mature. Clear rules of the game are being introduced on the cryptocurrency market. Due to this, it becomes open not only for institutional, but for retail investors as well. This makes it possible to expect an increased funds inflow in the near future from investors who believe in the cryptocurrency market development and integration of cryptocurrencies in various activity areas.
Introduction of stablecoins deprives Bitcoin of its core essence — physical possession. Due to this, large financial institutions eliminate a possibility of physical possession of crypto assets. Thus, the “lesser mortals” receive only “warranty bills” that can be used to redeem a real asset in the near future (with this possibility not always being available). The similar story once happened to gold. We shouldn’t remind of the end of this story once again.
It’s also worth mentioning that introduction of fiat currency-backed stablecoins contributes to increasing inflation processes on the crypto market. Moreover, another category of stablecoins contributes to establishment of private central banks on the cryptocurrency market.
An attitude towards the crypto market institutionalization may vary greatly. Anyway, the advent of a new era is a matter of time. It’s probable that institutionalization will conquer the cryptocurrency market in no time and become the driving force of its next development cycle. The only and most important question is what will happen to Bitcoins and similar crypto assets? Will they retain their influence? Very soon, we will know the answers to these questions.
