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Why Stablecoins are Securing the Future of Crypto World

Nicholas Otieno   Mar 29, 2020 00:45 3 Min Read


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The coronavirus pandemic continues to wreak havoc across the world, leaving some nations at a standstill. Although most people consider wellbeing and health as the main victims of the virus, economic implications are continuing to surface at alarming rates. Concerns over the economic hit from the virus spread from oil, stock and bonds to cryptocurrencies.  Bitcoin crashed to its worst day in seven years. Investors are facing coronavirus-induced volatility in the market. Many are worried by the fear of the world economy to slow down, which is thus affecting not only the stock prices to dip down, but also several people are beginning to lose their jobs.

Crypto users have been left baffled and discouraged as the coronavirus outbreak appears to have hit cryptocurrency even harder than the stock market. On 12th March 2020, Bitcoin has sharply fallen more than 40% to about $3,850, its lowest level since March last year and the largest one-day drop in seven years. This indicated that Bitcoin is moving with the markets instead of operating as a safe-haven.

While all crypto market capitalizations have experienced similar cuts, now cryptocurrency investors are turning to embrace stablecoins as a safe haven.  

Crypto users are going wild for stablecoins

With the value of cryptocurrencies declining, investors are seeking low volatility. Stablecoin seems to be the answer to the issues plaguing Bitcoin and other cryptocurrencies. It’s now proven that the first-generation cryptos are unfit to serve as a store of value or a medium of exchange because of erratic price movement caused by the absence of intrinsic value. Stablecoins try to solve the part of the issue in the first-generation cryptocurrencies – price volatility and lack of fundamental worth.

Stablecoins are linked to an underlying asset; thus their nominal value of holding is protected. The underlying asset could be a fiat currency like the USD, or a commodity like gold. First-generation cryptocurrencies are commonly known for their volatility. Stablecoins are designed to maintain a stable market price without significant price changes. By being pegged to real-world assets like gold or the US dollar, stablecoins avoid the wild price swings common in the cryptocurrency markets. Most stablecoins available are benchmarked to the US dollar, and the value tries to closely hug the $1 mark. The buyers of these coins are promised 1:1 payment in the underlying asset.

Most crypto traders and investors are increasingly seeking stablecoins. Although stablecoins don’t decline or rise in value, they can provide a hedge during this time when first-generation cryptocurrencies like Bitcoin have slowed down. Over the last 11 days, there has been an ongoing downward trend affecting cryptocurrencies. As such investors and traders are looking for an effective hedge to avoid ongoing losses to their portfolio, stablecoins have proven to be rather important in this regard.

The demand for USD coin has significantly increased as businesses and people want an architecture where they can receive and make payments with more security and less counterparty risk. Also, other leading stablecoins like Paxos Standard Token (PAX), Binance USD (BUSD), True USD (TUSD), and Tether (USDT) have seen high demand and, therefore a significant increase in their market capitalization right after the market downturn.

Financial institutions also pay interests on stablecoins

Various financial institutions have recently shown great interest and therefore see stablecoins as a potential solution. In November 2019, the World Economic Forum (WEF) discussed the true value of stablecoins, hence highlighted that these digital currencies could have significant potential in creating a more inclusive and fairer financial system for the world. In December 2019, the European Central Bank announced its plan to take the lead regarding stablecoins and to accelerate its efforts in the digital currency space. Central banks in China, Canada, and Britain also have demonstrated increased interests in stablecoins. In February 2020, the United States Commodity and Future Trading Commission (CFTC) held meeting with stablecoin industry experts, thus highlighted that stablecoins have potential impact, through tokenization, to function as a viable, liquid medium of exchange.  

As the world is struggling with the challenges caused by Covid-19, stablecoins appears to be the answer to the volatility inherent in the first-generation cryptocurrencies.

 

Image via Shutterstock


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