Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Five Myths about Stablecoins

“When an investor focuses on short-term investments; he or she is observing the variability of the portfolio, not the returns – in short, being fooled by randomness.” – Nassim Nicholas Taleb.

Stablecoins have become all the rage in the cryptocurrency world these days. In fact, developers are releasing a new stablecoin almost every day.

For instance, a small sampling of the stablecoins on the market includes the MakerDao or Dai (DAI), Tether (USDT), PEGUSD (PEGUSD), USD Coin (USDC), TureUSD (TUSD), Base Coin or Basis, Carbon (CARBON), and Haven (XHV).

To explain, most stablecoins are supporedly worth one unit of a fiat currency. For example, the USD Coin is supposedly valued at US Dollar. Stablecoin developers hope their creations will encourage cryptocurrency use by linking altcoins to fiat currency.

However, stablecoins are not that simple. Notably, there are many myths about stablecoins that distort their value. These myths include:

  1. Stablecoins are backed by fiat currency

Fiat currencies do not back or support stablecoins. Instead, there is a network of people who continually adjust a stablecoin’s Coin Price to keep it as close to the price of the fiat currency as possible.

For example, the group behind PEG and PEG.USD; the PEG Foundation, uses a network of PEG Instance Managers to maintain the cryptocurrency’s value. Thus, many stablecoins have a Coin Price that is less or more than the fiat currency they peg it too.

Therefore, a stablecoin like the TureUSD or USD Coin is separate from the US Dollar. Instead, a good way to think of a stablecoin is as a dollar-based asset or derivative. Hence, when you buy a USD Coin, you are not buying a dollar. Instead, you are buying an asset that is supposedly worth $1 USD.

In addition, there are stablecoins backed by other assets. For example, the Bancor (BNT) cryptocurrency partially backs the PEG stablecoin. Moreover, there are plans for “stablecoins” backed by questionable assets such as real estate and stocks.

  1. Stablecoins are Immune to Market Instability

In reality, stablecoins add a level of market instability. A stablecoin like Tether is vulnerable to cryptocurrency market instability because it trades on cryptocurrency exchanges.

In addition, a stablecoin is also vulnerable to fiat currency market instability. For example, when the price of the US dollar falls, the price of TureUSD and PEGUSD will drop.

Stablecoins backed by assets like real estate will be vulnerable to the markets for their assets. For example, a real-estate stablecoin’s price will collapse if a real estate bubble bursts.

Therefore, stablecoins will not make cryptocurrencies or the cryptocurrency markets more stable. Conversely, stablecoins could make cryptocurrency less stable by exposing it to the stock and real estate markets.

  1. Stablecoins can be used just like fiat currency

Stablecoins suffer from all the limitations that affect other cryptocurrencies. For instance, you cannot go down to the supermarket and buy groceries with Tether.

Moreover, there are no Haven Visa cards or Haven MasterCards. Additionally, there is no app that lets you use Base Coin through Google Pay. Nor can get cash from an ATM with PEGUSD.

Stablecoins are not cash like fiat currency because they are not government backed. In fact, the only stablecoin issued by a central bank could function as cash.

There are no central bank issued cryptocurrencies in existence. However, various media outlets claim several central banks including the People’s Bank of China are working on national cryptocurrencies.

  1. Stablecoins are safer than Other Cryptocurrencies

Stablecoins are just as volatile, experimental, and disruptive as other cryptocurrencies. Thus, stablecoins offer more safety than other altcoins.

Stablecoins could be more dangerous than other cryptocurrencies because they can create an illusion of safety. To clarify users will think stablecoins are safer than other altcoins and buy more of them.

For instance, stablecoin owners will not monitor them like other cryptocurrency owners will. Thus, sudden price collapses are more likely to wipe stablecoin owners out. Additionally, stablecoins could create a false sense of safety and security that will encourage complacency and risk behavior. Hence, stablecoins will magnify the risks in the cryptocurrency markets.

The greatest danger to stablecoins is sudden panics. Stablecoin owners are likely to panic when they realize their coins are not fiat currency and no safer than other altcoins. Therefore, sudden selloffs are likely, particularly when rumors about stablecoin instability appear on social media.

  1. Stablecoins are a better asset or investment than other cryptocurrencies

Nobody knows how good an asset stablecoins are because they are new.

We do not know how safe or stable stablecoins really are because they have been around for less than a year. Thus nobody knows if the stablecoin concept will work or how well it works.

Therefore stablecoins, like most cryptocurrencies are a purely speculative asset. Stablecoin speculators bet that these assets will work as advertised. If stablecoins fail the speculators will lose their money.

Thus, stablecoins are an inherently risky asset based on unproven technologies and business models. Thus only people who can afford to lose money should buy stablecoins.

Everybody else must stay far away from stablecoins until they prove the concept. Moreover, only Mr. Market will tell us which stablecoins work and which do not. Until we know that avoiding stablecoins is a smart strategy.

“Uncertainty is actually the friend of the buyer of long-term values.” – Warren Buffett.