Market Mad House

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

Cryptocurrency

Why Stablecoins are dangerous and are Swiss Franc Stablecoins safe

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I think stablecoins are dangerous because they offer an illusion of stability. Stablecoins are among the most dangerous crypto assets because they are not what they appear to be.

To explain, stablecoin promoters advertise their products as backed by; or pegged to, historically stable fiat currencies like the US dollar or the pound sterling. However, stablecoins like the USD Coin (USDC) or the EURS (EURS) are smart contracts they program to pay someone a dollar or a Euro when a person spends the token.

Thus stablecoins do not represent fiat currency as many of their proponents claim. In fact, the State Street Bank (NYSE: STT) holds the dollars pegged to the Gemini Dollar (GUSD) in trust. Thus the fiat currency is not in the crypto asset as some people think. Hence, the Gemini Dollar is really a contract to pay somebody $1 from an account at State Street.

Therefore, a stablecoin liquidity crisis in which the entity issuing the coins has no money is a possibility. Notably, none of the stablecoins I have seen is insured by a government agency like bank accounts in many countries are. However, the New York State Department of Financial Services (NYDFS) regulates but does not insure the Gemini Dollar.

Why Stablecoins are Dangerous

Secondly, stablecoins have the same volatility as other cryptocurrencies. In fact, stablecoin prices often deviate from fiat currency prices.

For example, according to CoinMarketCap Tether (USDT); the most popular stablecoin, had a Coin Price of $1.01 USD on 20 March 2019. Thus, Tether’s price differs from the fiat currency; the US dollar, they supposedly peg it to.

Nor it is just Tether that deviates from the dollar. For instance, the USD Coin (USDC) had a Coin Price of $1.01 USD on 20 March 2019. Hence, stablecoins are more volatile than the fiat currencies backing them.

Strangely, current market conditions indicate speculators think the USD and Tether are worth more than the greenback. Thus, market forces and speculators’ irrationality determine the value of stablecoins.

Stablecoins are not Bubble Proof

Under these conditions, people who think stablecoins are immune to the market are in for a nasty surprise one day. For instance, Tether or USD Coin’s price could drop to 50₵ or shoot up to $10 or $20.

Hence, speculative bubbles will affect stablecoins. In fact, I think all it will take is a big demand for Tether or Gemini Dollar to trigger a stablecoin bubble.

Moreover, outside events could affect stablecoins’ prices and market caps. For instance, President Donald J. Trump’s (R-New York) impeachment, defeat, resignation, or reelection could cause the dollar’s value drop. Obviously that will cause the value of Tether or Stronghold (USD) to drop.\

Conversely, a drop in the US dollar’s value could increase the demand and price for the STATIS EURS (EURS) or Swiss Franc stablecoins like Smart Valor or ROCKZ (APZ). In addition, inflation or hyperinflation in a major economy like India, Brazil, or China could send the value of the dollar, Euro, Swiss Franc, or pound-backed stablecoins soaring.

Consequently, stablecoins are dangerous because they are not bubble-proof. Instead, stablecoins could be more vulnerable to bubbles because fiat currency demand can affect their prices.

Are Swiss Franc pegged stablecoins really Bulletproof?

Strangely, the promoters behind two new stablecoins seem to understand the inherent dangers behind these crypto assets. To clarify, ROCKZ and Smart Valor are planning stablecoins they will peg to the Swiss Franc.

Many observers consider the Swiss Franc (CHF) one of the world’s most bulletproof currencies. For instance, the Swiss Franc was valued at $1 USD on 20 March 2019.\

Notably, Switzerland is a small historically neutral country with no major controversies or enemies. Unlike the United States or China, Switzerland is unlikely to go to war.

Plus, Switzerland is unlikely to break up like the European Union; or the United Kingdom could. Finally, the possibilities of revolution, economic collapse, political crisis, or civil unrest in ultra-democratic and hyper-capitalist Switzerland are remote.

When combined with Switzerland’s history as a banking leader, this stability makes the Swiss Franc among the world’s most appealing small currencies. Not surprisingly, organizations like ROCKZ and Smart Valor are planning CHF stablecoins.

Are the Swiss Franc Stablecoins for Real?

To clarify, these claims are theoretical because neither ROCKZ nor Smart Valor appears to be available yet.

However, Alprockz AG; the organization behind ROCKZ is issuing a utility token called APZ. However I could not find the APZ token traded on CoinMarketCap, a sign it is not live yet. In addition, the ROCKZ platform is live online. Instead, Alprockz is holding an APZ ICO to raise.

On the other hand, ROCKZ founder Yassine Ben Hamida claims his venture has a Market Capitalization of $2 billion. Furthermore the ROCKZ website claims to have raised 1.3 billion CHF or $1.3 billion USD.

How Swiss Franc Stablecoins could offer liquidity 

Interestingly, ROCKZ hopes to offer liquidity by keeping 90% of its Swiss Franc holdings in paper in vaults and 10% at various Swiss Banks. Notably, this could ensure liquidity but not stability.

Liquidity is more important than stability because you can cash out a liquid currency and spend it. For instance, you can quickly convert the currency into something you can use to buy food for your family.

To clarify, you can quickly convert the Swiss Franc into United States Dollars; or Euros, which merchants all over the world will accept. Notably butchers in hyperinflation basket case Venezuela will accept payment in US Dollars; even though it is technically illegal, The Guardian reports.

To explain, the international currency markets still determine the value of Swiss Franc. However, ROCKZ owners will have an altcoin they can cash in for a spendable fiat currency if this scheme works.

Fewer details about Smart Valor are available but the organization is planning an initial coin offering (ICO) and a crypto asset platform. Importantly, Smart Valor calls its product a “Smart Token” rather than an altcoin.

Hence, I think the Smart Valor token is really a smart contract that will guarantee payment in Swiss Francs. Such a contract could be valuable because it can theoretically guarantee payment in one of the world’s safest currencies.

Are Stablecoins a good investment?

I think stabecoins could be a good speculative investment even though they are dangerous.

To elaborate, I predict there will be a big demand for stablecoins because many of the world’s fiat currencies are unstable. For instance, the citizens of some major economies like Brazil, China, Russia, and India distrust their national currencies.

In addition, some national leaders like India’s Prime Minister Narendra Modi are prone to do weird things with currencies. For instance, Modi declared most of the paper money in his country worthless on 8 November 2016.

Finally, Brexit and Trump’s election prove any country is susceptible to political instability. Under those circumstances, people all over the world will want to protect their holdings from turmoil. Stablecoins could be the perfect mechanism for doing that.

Hence, all speculators need to look at stablecoins because they could be subject to sudden price fluctuations.Stablecoins may not be stable but shrewd speculators could make a lot of money by trading them. However stablecoins are dangerous because speculators could lose a lot of money through stablecoin trading.