Few understand this.
It would be an understatement to say that the stablecoin market has come back into the spotlight in recent days. With the collapse of TerraUSD (UST), all regulators around the world now have their eyes on stablecoins. As you know, stablecoins are special cryptocurrencies whose purpose is usually to be pegged 1:1 with a fiat currency.
Generally, it is with the US dollar that the most popular stablecoins aim to peg 1:1. This is the case with USDT (Tether) or USDC (USD Coin). But this was also the case with the UST of Terra.
To ensure this parity mechanism, different strategies exist. A 100% parity on the US dollar, is the case of the USDC. A parity with US dollars and other assets (including possibly Bitcoin), such as USDT. In the case of TerraUSD, the approach was different again. Revolutionary according to its founder Do Kwon, who said that algorithmic stablecoins, like his UST, were the future.
Many people wanted to believe in it for several months, which explains the incredible success of the Terra ecosystem when all the flaws exploited recently were already visible and known to everyone. But as you know, greed leads to blindness. And some people are willing to believe in miracles to make more and more money.
Analysts from Goldman Sachs have rightly compared the current state of the stablecoin market with that of private banknotes, which circulated as money during the 19th century before being later replaced by national banknotes subject to federal oversight.
For these analysts, there is a great similarity.
These private banknotes were issued during the Free Banking Era in America from 1837 to 1863. Such bills were used as money, but traded at discounts, due to the large number in circulation and the difficulty of discovering bank-specific risks across the system. This is one of the features of the TerraUSD that has just collapsed.
Just as these banknotes respond to bank-specific risks, the various stablecoins are exposed to protocol-specific risks. The way they are pegged 1:1 to the US dollar is different. Using these different stablecoins across platforms can be more or less complicated as well, as described in the analysts’ note:
“There are a large number of alternative stablecoins that can coexist, each with its own risk profile, making them difficult to use across platforms, much like private money once was away from issuing banks.”
The second lesson Goldman Sachs is putting forward is to prepare you for the emergence of CBDCs in the years to come. American regulators, but regulators around the world in general, will not hesitate to use the example of the TerraUSD collapse to say that these stablecoins are too risky and that their CBDCs are a better option for the general public.
Here’s what Goldman Sachs analysts say:
“The second key lesson from this experience is that while private and public money can coexist for a time, the private money system is eventually regulated and/or later supplanted by public money.”
From a historical point of view, Goldman Sachs’ point of view is a reality, since private banknotes were replaced by national banknotes after the National Banking Act was passed in 1863.
So in the future, you can’t know whether governments will limit themselves to stricter regulation of stablecoins or even force the ecosystem to migrate to their CBDC-like alternatives.
It is this uncertainty that I think you need to consider, and why Bitcoin is the best stablecoin on the market.
Recently, Tether has just released a proof of reserves to calm things down after the storm around Terra. However, the questions around Tether will continue to remain. The USDC appears to be safer, as it is backed 100% by the US dollar, but existing regulatory risks make its future just as uncertain.
Still, many people continue to invest their cryptocurrency profits in USDT or USDC to avoid paying capital gains taxes. It’s something that works, but it’s risky as the TerraUST collapse showed us. A collapse that could happen tomorrow for the USDT or USDC. It seems unlikely to you, but with these centralized stablecoins, the worst is still possible, because governments have all the power over them.
Also, you need to remember why you started buying Bitcoin in the first place.
Bitcoin allows you to protect yourself from monetary inflation in a way that is resistant to censorship. By placing your wealth in stablecoin, you are pegged at best 1:1 with the US dollar. You are not protecting yourself from currency inflation, just as you are not protecting yourself from censorship.
Because don’t be blinded by these stablecoins, they tie you directly to the US dollar. An American dollar whose value keeps falling over time. Judge for yourself:
And this illustration ends in 2019. Since then, your U.S. dollar purchasing power has only collapsed a little more, while the U.S. public debt has surpassed $30T and more than 30% of all U.S. dollars in circulation have been printed out of thin air by the Fed to combat the COVID-19 pandemic.
With Bitcoin, you have one essential guarantee to keep in mind:
1 BTC from 2009 is still equal to 1 in 21 million BTC in 2022.
And that truth will still be true in 5 years, 10 years, or even 50 years. That’s the magic of encrypted P2P hard money like Bitcoin. No one controls Bitcoin, which means the network belongs to all its users. Bitcoin gives you incredible guarantees, but you still need to understand why to benefit from it.
That’s what I always urge you to do. Once you do, you will understand, as all Bitcoiners do, that Bitcoin is the best stablecoin around. To take advantage of this stable side of the Bitcoin protocol, you need to avoid constantly looking at the price of Bitcoin in USD.
Stop thinking in fiat currency, but instead think in the codes of the Bitcoin world.
That way, when the regulators come after the most popular stablecoins, USDT or USDC, you will be protected by Bitcoin. Governments can exercise their power over the exchange platforms or the people controlling the stablecoins, but they can’t exercise their power over your Bitcoin as long as you’ve taken care to get your private keys.
You know what you have to do now.