A New Breed of Stablecoins is Bucking Crypto Volatility
Oliver Stone still struggles to get financing for some of his films, even though a large adoring public is willing to pay for his opuses. Crowdfunding provides a clever way for these fans to directly fund future filmmakers. Peer-to-peer financing is bringing thousands of films to screens big and small that would never have been made otherwise. Yet still, most film projects do not get made. Less than a quarter of films seeking over $100k succeed and, even then, the average indie film costs $1 million to make.
The selling of cryptocurrency tokens on assets is opening up new financing channels. On the blockchain, you can tokenize anything—real estate, films, music, art, commodities and more. But how do you convince investors to invest money in volatile cryptocurrencies in the film industry? Since 80 percent of films fail to make a profit, most investors will eschew the additional cryptocurrency risk.
The solution is collateralizing crypto. By issuing stablecoins, even Oliver Stone can dust off his political hot potatoes. These digital currencies reduce exposure to cryptocurrency volatility and provide added collateral by backing each token 1:1 by the stable US dollar, or another low volatility asset.
“The next definition of money is up for grabs” – Naval Ravikant
Stablecoins are delivering Satoshi Nakamoto’s vision of a peer-to-peer payment system without fraud or double spending. Even the developer of Bitcoin did not foresee the digital coin’s disruptive introduction to the world of commerce. The rapid growth in popularity of cryptocurrencies and a constant flow of new coins have led to erratic adoption rates and trading. Owing to the high volatility, the adoption of the virtual money as a payment method has been seen as impractical.
Stablecoins offer a commercially viable medium of exchange by pegging their value to that of an underlying asset like the US dollar or gold to reduce volatility. Volatility in major currencies is under 1 percent whereas 30-day Bitcoin volatility has spiked to 3.91 percent. The digital currencies provide the safety of low volatility fiat currencies with the benefits of low cost, transparent and secure digital currency payments.
Most stablecoins are being used as a store of value and medium of exchange in merchant transactions. Fiat currency (US dollar-backed Tether (USTD) or Gemini (GUSD)) and cryptocurrencies (Havven (HAV), MakerDAO (DAO)) are the most popular form of collateralization. Some coins are algorithmically adjusted (Basecoin, Carbon) with changes in supply and demand to maintain a peg, for example, to the US dollar.
A third form of collateralization opening up new forms of financing is digital assets. Many stablecoins use gold for a peg (e.g., Digix (DGX)) but any asset can be tokenized. TrustToken (TUSD) has created a bridge between real-world assets and crypto investment by providing a platform on which users can tokenize assets—a film, music, real estate and so on—and then sell the TUSD token to any investor in the world. A key advantage of tokenization is the ability to fractionalize assets and extend the investor base to smaller investors. To entice investors, 51% of stablecoins are programmed to provide a dividend or other incentive mechanism finds a Blockchain.com report. Whether or not the film or other investment is a success, when investors want to cash out, they can exchange each token for a US dollar—for parity, more or less.
Because of stablecoins lower investment risk, the total crypto market value of the more than 150 stablecoins already in circulation—currently $3 billion, or 1.5% of the total market value of all cryptoassets—is quickly growing (blockchain.com). A new stablecoin is being announced daily, according to the newly formed Stablecoin Association.
How Stable Are Stable Coins?
Investors should not assume an investment in any Stablecoin is a safe haven. Although stablecoins have generally done well-holding parity with the dollar, they can appreciate or depreciate in value relative to the dollar. The high volatility in cryptocurrencies in November revealed how stablecoins will ride out the price swings.
The bellwether Stablecoin Tether (USDT), which has been more volatile following reports it has not released audits proving reserves equal to the number of stablecoins issued, showed a higher correlation with Bitcoin than stablecoins. Tether, which comprises 93% of stablecoin market value, is slowly ceding market share to new entrants providing more collateral and regulatory assurance.
Tether volume spiked up on November 19th reaching an all-time high of 5.9 million, almost doubling (96 percent) its November 18th volume, as investors scrambled to escape the BTC price declines. Its price, though, declined from near parity at the opening on November 19th ($0.997777) to $0.9676 November 20th.
However, even in times of high volatility, a coin backed by a stable currency or assets can minimize downside risk exposure. As Bitcoin prices fell in November, Bitcoin volatility spiked to three times that of Tether. As their makers intended, Stablecoins have become a flight to safety during market tumbles. Volumes soared in Stablecoins as investors diverted their money to DAI (Dai), TUSD (TrustToken), USDC (USD Coin), and to a lesser extent USDT—although Tether still has about three times the volume of the other three coins combined.
Not All Stablecoins Are Alike
The price action in Stablecoins differed significantly across coins. As Tether and Bitcoin fell the price of a new breed of coins soared (see stablecoins Price chart). These newly minted stablecoins have lessened risk by becoming regulated and providing a verifiable audit trail to assure investors the reserves exist to cover withdrawals. Yet each coin has different issuance, collateral and adjustment mechanisms.
TrustToken—the stablecoin platform for tokenizing your assets under your own token—places your asset in a SmartTrust, which serves as a legal entity to comply with financial regulations. To manage your assets, the TrustToken ecosystem provides an open market of trust companies acting as fiduciaries. Since its ICO listing in April, TrustUSD has swiftly climbed to the rank of 29 on Coinmarketcap while growing to a market cap of $186 million.
Other newcomers this year GeminiUSD (GUSD) and Paxos (PAX) are registered with the New York State Department of Financial Services and the New York Banking Law. TrustToken’s advantage is the ability to choose a fiduciary in whichever jurisdiction you require from the TrustMarket.
In the case of security breaches, various inbuilt mechanisms have been designed. Gemini has a proxy layer that can halt and reverse coin issuance and transfers in the face of a security incident. When attacked, Dai’s (DAI) price sensitivity mechanism triggers a global settlement to minimize losses.
The collateral backing is also being fortified. Dai plans to move from a single to a multi-currency basket of currencies, which will include at least one other stablecoin, the TrustToken. Hybrid models are emerging such as X8Currency backed by 8 fiat currencies + gold or carats.io (CARAT) algorithmically pegged to the Diamond Financial Index (DFI))
The price and volume strength of stablecoins in this most recent bout of high cryptocurrency volatility affirms the role of stablecoins in supporting the wider adoption of cryptocurrencies as a medium of exchange. But it also revealed that not all stablecoins are alike. TUSD, GUSD, PAX, and USDC exhibited a strong negative price correlation to their forebears’ Bitcoin and Tether. With this new crop of stablecoins, Satoshi’s vision of global e-commerce in which “money can be secure and transactions effortless” has finally arrived.
Misha, a Tokyo-based ex-recruiter, author and blogger. In the past 5 years, he has helped companies like Facebook and Amazon build their hiring strategies, started (and shut down) his own company, learned Japanese and quits his job. Nowadays he writes a lot. He is the author of Bullish on Bitcoin: 37 Strategies to Profit in the New Crypto Economy. http://mybook.to/bullishonbitcoin. He also hosts a monthly Q&A session, which you can check out by becoming a Patron.