Ripple recently featured an article by Fundstrat managing partner Tom Lee where he talked about stablecoins and why pegging the value of a coin to less volatile assets may not guarantee stability.
Lee is a well-known Bitcoin bull, but he was in the news last year for cutting his year-end forecast for Bitcoin from $25,000 to $15,000, then eventually down to between $13,800 and $14,800.
Stablecoins and pegging problems
Lee noted that the stablecoins are a “welcome attempt” to add stability to the volatile crypto assets market.
These stablecoins, like Tether and Haaven, are usually pegged to fiat currencies like the US dollar, gold reserves, and even “the algorithm behind the digital asset itself.”
He said that stablecoins could have a calming effect on the market but added, “history demonstrates that the stability promised by the name ‘stablecoins’ is impossible to guarantee.”
Talking about past examples of pegging, Lee noted that this exercise creates an artificially stable economic environment that will not sustain over a long period within a wider unconstrained market.
He noted that pegging to fiat currency is only a short-term solution as unpegging will be inevitable and will cause serious instability when it does.
He noted how Nigeria’s currency naira was pegged to the US dollar to maintain stability but had to be unpegged during the decline in oil prices in the middle of this decade.
Soon after, the currency’s value fell by a whopping 30%, causing skyrocketing inflation.
The Nigerian government spent 20% of their foreign reserves in maintaining the peg before they were eventually forced to unpeg.
A similar thing happened in Thailand when the Thai Baht was pegged to the USD in the 1990s but had to abandon it in 1997 after spending billions defending, causing a financial crisis eventually.
How does the market behave?
Lee noted that:
“The problem with pegging is that the theory relies on the market behaving in specific ways. But you can’t tell the market what to do. Either people find loopholes to exploit, create a black market that better reflects real value or simply don’t behave as the efficient-market hypothesis suggests they should.”
He noted that the Swiss franc and Singapore dollar could be better options for stable pegging currencies than the USD because of their stable governments and central banks.
However, USD is the default peg because people trust it and also because of its legacy and emotional appeal.
He noted how some people would buy Tether even if others were panic selling because they trust that the company will return it to its pegged price.
He finally added that perceived trust in an asset and if it has a clear use case or not are the two major contributors to assessing whether a stablecoin has “staying power” or not.