Stable Coins: Friend of Foe?
Hello again, it’s Tim. I wanted to express my thoughts on stable coins. What is a “stable coin”? Why do people choose to put money into an asset that is guaranteed to go down in value over time? What is so great about a cryptocurrency that is tied to the USD? These are the questions I will take a look at today. Coins like Tether (USDT), USD coin, True USD etc. are all considered “stable coins”. They are all tied to the same thing, the US dollar. But why? Lets discuss!
Why would anyone tie a cryptocurrency to the US dollar? If you are a crypto-head like me you have a rabid dislike for government controlled fiat currency. But is there utility in using the US dollar as a “stable coin”? All you need to do is look at CoinMarketCap to see how popular USDT (Tether) is. It is currently sitting at #8 amongst all the coins on CoinMarketCap. But why is it so popular? Well one reason is many traders will exit a position when they think the end of an uptrend in market prices is near. This helps them escape the volatile nature of cryptocurrency. For instance, let’s say Ernie buys 1 BTC and decides he wants to accumulate more Satoshis instead of simply sitting on his BTC. This is where stable coins come into play. Ernie can do some technical analysis and assume, based on trends and other factors, when he should take that BTC and exchange it for stable coins. The reason for this is his profit will not diminish overnight. If he buys BTC at $3500 and it goes up to $4,000 the next week, Ernie has made a $500 profit. Pretty nice! But if Ernie just sits on his 1 BTC the price may fall back down to $3500 which would leave Ernie with $0 profit. If Ernie sold his BTC for a stable coin his profits would be locked in at $500. He could cash that $500 out or he could choose to take that profit and buy back into BTC when the price goes back down. If Ernie took the path of buying back into BTC with his $500 profit he will increase his Satoshis. This is how many traders operate.
The US dollar is considered “stable” in the world of cryptocurrency simply because its not as volatile. But truth be told the US dollar is anything but “stable”, but that’s a topic we can discuss in another write up. It is a misnomer to call the US dollar stable. It is simply less volatile due to the over whelming supply. If you include investments, paper money and any representation of the USD (stocks, bonds, banks, derivatives etc.) you are looking at over a 1,000,000,000,000,000. This number is 1 quadrillion. That’s a lot! With a supply that high volatility isn’t such a big factor. This is what makes the US dollar attractive to people that are trading cryptocurrency. If you put $100 into crypto and sit on it you may end up with $50 worth of BTC a week later. This is an example of volatility. You still hold the same amount of BTC, but the US dollar value has been cut in half. This is the entire reason stable coins are so popular. But are they destroying the market? Or are they a useful tool?
The argument against stable coins
I know plenty of people that think stable coins do not help the market. You will see them talk about how stable coins eat up a significant portion of the total marketcap. As of 3/13/2019 the top 10 coins all have significant daily volumes. But the top is BTC which is sitting at $9,424,681,785, 2nd is USDT (Tether) which is sitting at $7,398,403,155. There are a lot of factors to consider when looking at 24-hour volume, but no matter how you slice it there is a lot of money flowing between USDT and BTC. If I were to combine all the stable coins available on the market it would be significantly larger. People argue that if USDT wasn’t around all the money parked in USDT would be in BTC and other coins. This argument is based on assumptions. How can anyone tell if that’s true or not? I used to think the same way, but I have changed my views. Without USDT I believe many people wouldn’t trade due to the possibility of losing profit. There are other ways to lock in profit, but USDT and other stable coins make it very easy to lock in profit. I have a love hate relationship with stable coins. There is utility in them. Nobody is going to buy a bag full of USDT and sit on it hoping it will gain value. That’s not how it works. But it can still be a useful tool when trading cryptocurrency.
Stable coins are loved and hated in the crypto community. Could BTC and other cryptocurrencies survive without USDT? Sure, they could. But I believe the creation of stable coins is a natural progression in the market. It is a useful tool for traders. Without USDT and other stable coins I believe traders would have a tougher time locking in profit. USDT is unique in the fact it can assist traders without having to necessarily cash out. With all the fees involved in cashing out to a bank and the time it takes to show up in your account you may just miss the next pump. That is a trader’s worst nightmare! This is why USDT is so appreciated, and I believe stable coins will be around for a long time. Do I like the US dollar? Not personally. But I can dislike something and still see utility in it. I hope you enjoyed this write up!
Written by: Tim Pace 3/13/2019 (Happy Birthday Mom!)