Dealing With Volatility: Stablecoins, And A Road To The Mature Crypto Market
While the cryptocurrency space still has a fair share of its problems, such as scalability issues that are troubling numerous older coins, as well as the lack of regulations and support from institutions, another big problem that remains is high volatility.
There have been many attempts to tackle the problem of price changes, and the most successful one so far has been through stablecoins. However, there are many who believe that stablecoins are only a temporary solution, as they remain partially centralized due to the fact that they are backed by fiat currencies that rest in accounts of various banks.
Are Stablecoins The Way To Go?
As mentioned, the crypto market has attempted to find a safe space in stablecoins, which were always viewed as controversial and risky, until they started receiving attention in 2018. The crypto market crashed right after the biggest rally in its history, which has attracted thousands of new investors. As a result, people were desperate for some form of stability, and stablecoins saw their opportunity.
At the time, they were led by Tether (USDT), which still remains the largest stablecoin by market cap to this day, despite the recent controversies. Stablecoins’ largest advantage is that they are backed by a fiat currency. While there are some alternatives to this method of maintaining value, most of the currently popular coins choose to use traditional money to back their tokens.
By following a sensible model where each coin is backed by $1, stablecoins managed to keep their value at $1 even when the market reduced the value of every other crypto, some of which lost as much as 80%. Why is this a weakness, then?
As seen in Tether’s case, the entity that has released the stablecoin is the one responsible for backing it up. This means that the company Tether, in this example, needs to have enough USD to back every single USDT that is currently in circulation. The problem arose when Tether failed to provide insight into its accounts, which has caused many to believe that the stablecoin may be worthless.
However, Tether managed to survive the panic selling simply because there are enough people that still believed in it. Even so, the controversy was bad enough to inspire a number of investors to seek out alternatives to Tether. This has led to an entire stablecoin flood, where numerous new coins such as GUSD, USDC, and several others started gaining popularity.
Meanwhile, analysts say that the market still believes in Tether to an extent. While this is not a logical thing to do, the market often does not act based on logic. One of the large forces that control the market behavior is sentiment, which is really the main reason why USD is the currency that most stablecoins choose to go for. While there are numerous other fiat currencies that show far more stability than the USD, the US dollar remains the most popular currency around the world.
Most people use it for online purchases, for example, even if they live in countries that do not use the USD. Online stores use dollars more than EUR, GBP, or any other currency. The same is with Tether — it has a well-known name, a long history, and it did not have incidents apart from failing to provide audits.
Can Other Cryptocurrencies Make Stablecoins Obsolete?
As mentioned, stablecoins are necessary due to the high volatility that still represents a huge issue in the crypto market. Some have even suggested that stablecoins saved the market in 2018, as investors had a safe cryptocurrency to turn to while the major coins were dropping. However, the question remains — can other cryptos reach enough stability to make stablecoins obsolete, or are stablecoins here to stay?
The answer is unknown, however, speculations say that this might happen at some point in the future. Let’s use XRP as an example, and take a look at its recent report about the coin’s behavior in Q4 of 2018.
According to the report, XRP has grown to become quite a popular and tradeable coin in 2018. The coin sold around $129.03 million in XRP in Q4 alone and $535.56 million throughout the entire year. Furthermore, XRP is currently listed on more than 100 exchanges, and it collaborates with even more banks and financial institutions.
Not only that, but its volatility dropped significantly in the last quarter of 2018, which indicates that the coin is maturing. Many believe that this is what the entire market needs — a chance to mature and find stability on its own. While it was speculated that this might come faster through the introduction of institutional investors to the market, others claim that it might happen on its own over time.
If the crypto world does end up having to take care of itself, another theory is that it will have to evolve and find new solutions to these issues. Whatever the case may be, the reduction of volatility has yet to be achieved, even for the XRP. However, this coin, at least, seems to be on the right path, and it may even serve to point the way to others.