Stablecoins Safer than Bitcoin ?

The start of the last month of 2018 has witnessed a huge plunge in the value of Bitcoin. This is the lowest ever the cryptocurrency has gone since last year, with its all-time high of US $20,000 ($20035.90 to be exact) in December 2017 to the US $3314 this month, according to CoinMarketCap as evident from the chart below.

This has raised some serious doubts about the future of cryptocurrencies in the mind of the investors. Many investors want to make the transition to something more stable in this period of uncertainty.

CoinMarketCap: Bitcoin Price Movement

A new solution known as "stablecoins" have come to rescue from all of these problems. Cryptocurrencies are simply digital tokens which act as a form of alternate currency and allow people to transfer funds or make payments without the need of an intermediary. Most of these currencies do not possess any intrinsic value and get their price from what the other people are willing to pay. Hoping that these values will rise, has lead to a great price volatility in the price of cryptocurrencies.

Stablecoins intend to solve the volatility problem by maintaining their worth by making these stablecoins redeemable with traditional currencies such as the US Dollar or even gold.

Stablecoins underlying asset, say gold, would be initially deposited in a trusted bank. Since these coins would be redeemable with the said currencies, given that the issuer has sufficient reserves for every coin in circulation, the price of the stablecoin should never fall below the value of the asset.

There are few existing and new stablecoins emerged such as GUSD (Gemini dollar),  DAI (MakerDao), PAX (Paxos Standard Token), TUSD (TrueUSD ) and USDT (Tether) all of which have their values connected to the US dollar.

Popularity of Stablecoins

The recent crash in the value of Bitcoin and several other cryptocurrencies have made the impression in the mind of investors that the value of these currencies is fairly unpredictable. This has lead to the widespread adoption of the idea of stablecoins altogether.

One reason why crypto exchanges are increasingly moving away from banking systems is that of the high rate of interest and the surveillance on payments made with cryptocurrency. In some extreme cases, exchanges even had their funds frozen by banks. Stablecoins look lucrative in this case since they directly deal with real currencies.

Last month Binance, Liquid, and CobinHood Cryptocurrency Exchange listed stablecoins on their platform.

Foreseeable Future

Even though stablecoins offer a solution to the problem of short-term volatility, they probably won't fix the problem of the lack of confidence, especially if the value of reserved assets is ever questioned.

Stablecoins might contribute to the reduction in the risk in the mind of investors, but its highly unlikely that they will be adopted in general use cases because of the high premium associated with using them.

That being said, it is not that stablecoins do not have any uses. People living in countries which do not have a stable local currency can invest in stablecoins to grab hold of more stable foreign currencies.