For those new to the cryptocurrency market, stablecoins represent one of the more difficult aspects to understand.  The reality of this point is further cemented when one has come into crypto because of Bitcoin or some other specific project or protocol that potentially serves as a universal ledger or universal unit of account.  While the technology and enthusiasm behind Non-Fungible Tokens has understandably garnered much of the attention in the latter half of 2021, it seems appropriate to address the role of stablecoins here at the end of the year in order to perhaps get a glimpse into where the market may be headed in the years to come.

First a simplified definition:  a stablecoin is a digital currency that seeks to avoid volatility by being pegged or backed by some other fixed asset like gold or fiat currency.  Of the stablecoins in circulation today, those pegged to the US dollar are the most prolific.  The most popular of these are USDT (Tethers) and USDC.

To the true believers in all that Bitcoin can be, the growth of stablecoins has been a non-event, something that can be ignored.  To those who see crypto’s growth and adoption as a major philosophical and political movement, the stablecoin is something that must be viewed in light of nations exploring their own “CBDC” or Central Bank Digital Currency.  As regulators and politicians in the US continue to grapple with crypto, stablecoins continue to be an easy target for disdain, and sadly, this only shows how poorly these people understand the technology.

While there are several varieties of stablecoins, the most prolific one is currently USDT, a coin that is backed by US-denominated assets.  For every USDT that is in circulation, there must be assets on the books that equal one dollar.  In other words, the USDT is good for the dollar, it promotes the dollar, and it makes having dollars more important than having any other currency.

While China has already rolled out a pilot version of its digital Yuan, the US has not as of yet rolled out the digital dollar.  One can hope that regulators are trying to see if the proliferation of stablecoins actually negates the need for a dollar-based CBDC.  While there is reason for hope, there are also plenty of reasons to fear what regulators and politicians may perhaps have in mind for a CBDC:  programmable money that can easily be manipulated.  Manipulated how?  It’s not hard to imagine stimulus payments that can only be used at “approved” vendors or loans that expire at different times for different people.  In short, it is critical to understand that CBDCs are not stablecoins, they are simply digital versions of the current fiat with the added ability to be programmed to suit specific agendas.

At present, neither Bitcoin nor any other digital currency serves the role of a universal unit of account.  It is still the US dollar that serves that role, though in an ever diminishing fashion.  Should Bitcoin continue to gain traction, there is a chance that stablecoins eventually disappear, but for now, they at the very least serve as a bridge between the old fiat system and the new crypto-based system.  To some degree, the proliferation of stablecoins has probably muted some of Bitcoin’s upward price action, because traders can use stablecoins to buy and sell other cryptocurrencies rather than using their still volatile Bitcoin.

To better understand the previous point, it is important to realize that on the vast majority of the world’s crypto exchanges, currencies are listed as “pairs,” and these pairs largely represent liquidity.  The cryptocurrencies with the most pairs have the most liquidity.  In the early days of crypto, the Bitcoin pair dominated.  Ethereum pairs followed.  Today, if a currency is listed on an exchange, it is likely to be listed as a pair with at least Bitcoin, and most likely with USDT as well.  This is good news for the United States, and something crypto detractors in the US must understand if the US is going to be the leader in the digital asset space.

Up to this point, China has chosen the authoritarian route by banning Bitcoin mining and other crypto activities.  By coming to understand the value of stablecoins in our current financial environment, one gets a step closer to understanding the value of Bitcoin in our future financial environment, an environment where stability is a given, and not given to the political winds of the moment.

Categories: Markets

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