Blogs

Stablecoins, are these a solution for volatile cryptocurrencies?


  • The need for a solution for volatile cryptocurrencies
  • What are stablecoin and its categories
  • Stablecoins applications and limitations
  • Long way ahead for stablecoins

 

In our previous blog related to Blockchain, an emerging concept, a disruptive technology, Televisory discussed on the blockchain’s revolutionary technology, which has the potential to disrupt nearly every industry in the world. The underlying objective of blockchain is to create a new and improved payment system through means of secure currency (cryptocurrencies), which is decentralised, seamless, fast, secure and is universally acceptable. However, a fall in the value of most cryptocurrencies during 2018 raised a concern on their viability and wide acceptability, especially as a currency for goods and services. These virtual currencies were aimed to facilitate more secure and seamless transactions, but their fluctuating prices on a daily basis is fanning flames of speculations and misleading valuations (Read our earlier blog Analysing the price behaviour of the volatile cryptocurrency market). Several investors lost their wealth, who were enjoying a millionaire tag by investing in cryptocurrencies (especially bitcoin) in a matter of weeks, with wide fluctuations and movements seen during the major part of 2018.

Cryptos have been afflicted with high volatility in prices, where 5% or even more than 10% fluctuation in prices on a daily basis is not unusual as seen in the above chart. This is the reason why cryptocurrencies have been criticised for becoming a mean of speculative investments rather than currencies or assets.

This is one of the critical reasons why stablecoins came in the picture. As the name suggests, stablecoins are cryptos which have added benefits of stability, with digital transfer of values. Stablecoins are much more stable and fixed than other cryptocurrencies as they are pegged to other assets or units of value which are globally recognised. These assets or units of value can be US dollar, commodities such as gold, oil, industrial metals, traditional asset class such as cash, bonds or other fiat currencies as well as CDPs (collateralized debt positions) of cryptocurrencies.

In other words, stablecoin comes with benefits of cryptocurrencies; digitisation and fast transactions, transparent, secure, seamless, low fee and maintain privacy without losing stability and trust like other fiat currencies. Stablecoins, which are directly backed by currencies or commodities are referred to as centralised, whereas those leveraging on other cryptocurrencies are said to be decentralised.

Currently, stablecoins have ~$2.75 billion as the total market cap, which is ~2% of the total market cap of all cryptocurrencies (Source: Televisory’s Research). Moreover, they are listed on over 50 exchanges. Tether, the 2nd most active traded cryptocurrency after bitcoin and ranked 7th by market capitalisation is the most popular stablecoin and is used primarily by exchanges as a mean to offer liquidity just like the dollar. It provides a pathway to investors to get rid of inefficiencies due to actual cash out in the real US$ and allow them to convert their holdings into the equivalent of USD.

In a nutshell, volatility has been one of the major hindrances towards universal adoption of cryptocurrencies as a replacement for the fiat or real traditional assets. Stability is key for the mass market adoption and as the cryptocurrency markets continue to oscillate, investors are finding safe haven in stablecoins which is bridging the gap between fiat currencies and cryptocurrencies. Like any other nascent technology, stablecoins also have its pros and cons and require further experimentation and innovation. Stablecoins may prove faulty and struggle with perfect 1:1 parity in the long-run and might not provide an ultimate solution to price volatility in digital currencies due to their scalability and liquidity concerns but still, stablecoins could drive stability within the cryptocurrency ecosystem. It would be too early to say that inchoate stablecoins will become a crucial element in the dynamic cryptocurrency landscape, providing hedging mechanism in this highly volatile digital market as it not only competes with other cryptocurrencies but with fiat currencies alike. Furthermore, like other cryptocurrencies, stablecoins are set to augur a new era of monetary ecosystem and how successfully or unsuccessfully central banks manage their fiats is likely to influence the fate of digital currencies as a whole and their role in the financial system. 

Your Rating

Tire manufacturing industry, analysing the cost and margin trends

The global market for tire manufacturing stands at $180 billion. Michelin anticipates the long-term demand to rise at the rate of 5 to 10% a year in developing markets and 1 to 2% a year in mature...

Failure of Amazon in China, an analysis

E-commerce market in China Online consumer product retailers in China Performance of Amazon in China   Amazon is a global e-commerce player selling a wide...

An analysis of Malaysian rubber glove industry

How big is the international rubber gloves market? Reasons behind the healthy and steady growth Malaysia’s role in the industry Why are companies struggling for stable...

Rapidly growing Indian online food delivery industry and its unrealised profits

Evolution of online food delivery industry in India Geographical penetration and scope for expansion Key players and their zeal to balance revenue and costs   Online...

Can lithium-ion anode demand for needle coke reduce availability for electrode players?

What is needle coke? Uses of needle coke Lithium-ion battery manufacturers demand needle coke   Needle coke? Needle coke is a specialised form of petroleum coke...

Is the radio broadcasting industry in the U.S. dying? An analysis

Radio, the most powerful medium of reach in the U.S. Why the industry is moving at a slow pace? Radio’s health is still sound, will it continue in the long-term?   ...

Sri Lankan economic and political crisis

Sri Lanka’s latest political crisis, who governs the nation? Poor economic indicators adding to the nation’s woes   Sri Lanka is currently embroiled in a political crisis,...

Carbon black industry, strong potential for supernormal profitability?

What is carbon black? Its uses Impact of the environmental curbs in China   What is carbon black? Carbon black is a fine carbon powder and it is a disorderly...

Blockchain, an emerging concept, a disruptive technology (Part 1)

What is blockchain? How is blockchain revolutionary? Cryptocurrency, the new money ICOs, the new way of raising money Summary Blockchain is a software architecture...

Housing finance market in India. Is affordable housing driving the growth?

Overview of the housing finance sector in India Key players dominating the segment and their dynamics Factors driving aggressive demand for housing   The housing...

Rice industry outlook 2018

Major rice producers and consumers Global rice trade Factors dominating the trade   Rice is the 3 rd largest produced agricultural commodity in the world, after...

Indian wood panel industry, growth drivers and present trends

Current market scenario in the Indian plywood industry Growth in the housing sector and rapid urbanisation to provide the boost GST rationalization to reduce price difference...

Rise of Ant Financial, will the success story continue?

What is Ant Financial? Journey to become king of unicorn Will regulatory curbs hinder its success journey?    Ant Financial, an affiliate and integral part...

Baidu’s Apollo, the underdog of autonomous driving platform

Overview of the autonomous vehicle sector in the global automobile industry Search giant Baidu’s entry into the autonomous driving space Baidu’s approach in becoming a front-runner...

Malaysian rubber glove industry, an update

Rising global demand for gloves Impact of USP 800’s implementation and the US-China trade war on Malaysia’s rubber gloves industry Key challenges for the Malaysian rubber...

Unnoticed growth of the media and entertainment industry in India

Overall industry brief Growth of the M&E industry and its segments Major supporting elements of this growth   Media and Entertainment (M&E) is a very wide industry...

Battle for the textile and apparel industry in Southeast Asia

The reasons for China’s decreasing presence in the industry Initiatives by the governments in Southeast Asia to boost the textile trade Vietnam and Bangladesh’s quest to conquer...

OYO Rooms, an Indian start-up to enter Japan

Growth story of OYO Rooms in India Business model of OYO Rooms Analysis of strategy to enter Japan   OYO Rooms, the Indian start-up has decided to venture in Japan...

What’s in store for India’s first commercial REIT as it hit the market with Blackstone teaming up with Embassy Group

Overview of the partnership and assets of Embassy Office Parks Comparison of the Indian commercial office market space with other developed markets Road ahead for India’s...

German economy, will the slide continue?

Weakening global industrial demand weighs on Germany’s manufacturing sector Inflation and business climate take a hit with broader signs continuing to be subdued Future...