the blue ocean of stablecoins

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Cryptomarket still has key major obstacles: high volatility, the bottleneck of a fiat-crypto-fiat gateway, third-party risk, low transparency, low adoption and weak regulation. But things are about to change.

Cryptoassets are evolving at a high pace and over the past decade have already gone through its major phases. Even though some major market swings took place there is no doubt that the cryptoassets with the maturity of the market will become sustainable digital financial instruments with high demand.

Entering the new phase, security tokens and stablecoins as a new asset class will stimulate the growth of the cryptomarket. Full regulation and mass adoption will allow institutional investors to enter the crypto market and participate in fully regulated security token offerings (STO).

The blue ocean of stablecoins

The stablecoin market is booming and highly anticipated to become a safe haven for digital asset investors in volatile cryptomarket that has faced multiple significant crashes only during 2018 and far from showing smooth growth. A stablecoin is a type of cryptocurrency initially designed to minimize the price volatility. Stablecoins are mainly used as units of account or applied for value storage and other use cases where traditional volatile cryptocurrencies are less applicable.

Stablecoins have different designs to achieve price stability. The value of a stablecoin can be pegged to fiat currencies, commodities (such as gold, silver, diamonds, etc.), it can also be backed by another cryptocurrency or have an algorithmic design.

Key facts (February 2019):

  • The total market value of all stablecoins is around $3bln and 2.5% of the total cryptomarket capitalization, growing from almost zero in less than 24 months.
  • Bitcoin moving increasingly towards trading versus stablecoins.
  • The capitalization and variety of stablecoins are growing whether the cryptomarket growing or not.
  • Stablecoins are already an important part of the digital asset ecosystem accounting for around 26% of overall daily trading volume.
  • The number of active stablecoin projects has dramatically increased over the past 12 months. More than 60 different stablecoins already exist: some are live and others are at the pre-launch phase.
  • Stablecoins are listed on over 50 different exchanges at present featuring one or more Tier-1 exchange listings.
  • Around $550mln in venture funding has been raised by stablecoin projects.

Source: Coinmarketcap.com

Why do we need stablecoins?

For millions of individuals as well as institutions the volatility of crypto assets observed over the last years is desperate. Crypto price volatility with >10% daily swings has led critics to state that crypto are too speculative to store and transfer value. On the contrary, stablecoins provide an attempt to leverage upon the benefits of cryptos and combine it with the stability and trust of conventional assets.

Source: Coinmarketcap.com, Morgan Stanley “Update: Bitcoin, Cryptocurrencies and Blockchain

Stablecoins can solve many cases that traditional volatile cryptocurrencies fail. Low price volatility as a major advantage of stablecoins makes them more suitable for mainstream usage. It implies a wide range of applications: retailers can start accepting stablecoins for purchases, individuals can use them to store value, anyone with internet access can open a stablecoin wallet in seconds. For investors and traders, stablecoins provide a safe haven during market fluctuations.

Stability over decentralization

Tether (USDT) is by far the most popular stablecoin and is used primarily by exchanges to offer dollar-like liquidity. Certainly, last year we saw Tether demonstrating a real proof of demand for stablecoins. We saw use of Tether on exchanges like Poloniex that did not have access to US dollar deposits really take off. It helped to facilitate the rise of a number of exchanges that were either cut off or chose not to integrate with the existing banking system.

  • Tether (USDT) is the second most actively traded cryptocurrency (~60% of BTC daily trading volume) and earlier this year entered the top-10 cryptoasset rankings by market value.
  • Market capitalization for Tether grew from $7mln in 2017 to $2bln in February 2019
  • 24h volumes grew from $200mln in August 2017 to $5bln in February 2019
  • The ratio of daily volumes to market capitalization is huge and exceed 2x
  • Tether comprises 93% of all stablecoins market value

Source: Coinmarketcap.com

The upsurge in market capitalization has mainly come from adoption by active cryptocurrency traders who use Tether as risk management and hedging tool. Crypto traders can move funds into USDT to de-risk from general crypto volatility while simultaneously avoiding leaving the cryptocurrency market. USDT growth demonstrates the significant demand for stablecoins in the market.

But the centralization of fiat USD in offshore accounts and the opacity of operations intimidate market players to use Tether as a solid and secure stablecoin. Tether has started to lose market share with the success of new entrants gaining listings on major exchanges.

The success of Tether is evidence that the market has prioritized stability over decentralization. Anyone who prioritizes decentralization already has the option to own arguably the most decentralized cryptoasset, Bitcoin.

Indeed, the new stablecoin providing the right mix of price stability and decentralization will succeed in the future.

Future of stablecoins

  1. Stablecoins are a new cryptoasset class that is highly anticipated to grow in capitalization over the next years.
  2. Stablecoins will take over the lead on fiat money in blockchain industry solving fiat-crypto-fiat gateway issues.
  3. The capitalization of stablecoins will increase independently from the whole crypto market capitalization.
  4. Asset backed off-chain verity will increase along with competition among them.
  5. Algorithmic and on-chain asset backed coins will go live.
Source: Coinmarketcap.com, Bloomberg (February 2019)

Top 10 stablecoins are traded at an abnormal daily trading volume to market capitalization ratio, comparing to other liquid assets. It’s likely that stablecoin volume to capitalization ratio will reach the normal average in coming years and stablecoins market share will grow.

Conclusion

Stablecoins do not exist in the vacuum, and in addition to competing with other more volatile cryptoassets like bitcoin, they are also competing against national fiat currencies. How successful or unsuccessful central banks are at management and regulation of their national currencies will certainly influence the fate of stablecoins and cryptocurrencies as a whole. But stablecoins do not simply offer great competition in the marketplace for currencies and money, like bitcoin, they are helping to usher a new era of monetary innovation and encouraging established institutions to re-examine the nature and possibilities around one of our oldest institutions, money, and its role in the financial system.

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