Stablecoins offer most of the benefits of bitcoin (BTC), but without any of the volatility. This is the opinion of a wide number of industry figures and experts, all of whom affirm that removing volatility is the key to making cryptocurrencies viable as a means of payment.
Does this mean that the future of money belongs to stablecoins, and not to floating decentralized cryptocurrencies such as BTC? Well, even though some commentators do make this argument, the reality is a little different.
For one, bitcoin’s volatility might decrease over time as it becomes more popular, making it more suitable as a means of payment. In addition, it’s possible that stablecoins will be regulated virtually out of existence, while many may become unstable due to being pegged to inflationary fiat currencies.
Stablecoins, not bitcoin
Increasingly, the phrase ‘stablecoins, not Bitcoin’ has become a mantra within certain circles. Writing on Twitter, Messari researcher Ryan Watkins expressed this credo in a post from late May:
@RyanWatkins_ @twobitidiot that’s a big assumption strong censorship resistance doesn’t come cheap. and it’s a core… https://t.co/cJFPV9nHX5
— christophercamp (@christophercamp)
Saying that stablecoins solve “nearly every problem that Bitcoin does” is a strong statement, but a healthy number of other figures within the industry agree with Watkins.
Speaking to Cryptonews.com, the Maker Foundation’s Mike Porcaro suggested that the stablecoin Dai, which is operated by the Foundation, combines the pros of BTC with the pros of a ‘stable’ fiat currency such as the US dollar (to which Dai is pegged).
“Dai was created to offer the benefits of a decentralized token, like bitcoin: transparency, efficiency, security and accessibility, without the risk of volatility,” he said.
“Removing the volatility risk is critical to enabling transactions and payments on the blockchain and unlocking an economy.”
In fact, certain observers believe that the advantages of stablecoins over BTC are so significant that stablecoins such as USDC, PAXOS, USDT, TrueUSD and Dai will effectively kill off any chance BTC has of becoming a widely used means of payment. This was the view expressed by BlockTower Chief Investment Officer Ari Paul in a tweet from May:
2/ if someone is earning, say, USD and wants to remit that to family in India or Mexico, they need fast, cheap, and… https://t.co/6i6cCUow4C
— Ari Paul ⛓️ (@AriDavidPaul)
As of writing, there’s little reliable data on just how widely stablecoins are used for payments. There’s plenty of anecdotal evidence, but all of the payment platforms which let you pay using a limited number of stablecoins, also let you pay in bitcoin and ethereum (ETH), among other cryptoassets.
Declining bitcoin volatility
There is, however, little doubt that bitcoin is more volatile than the typical stablecoin.
BTC price chart
Clearly, if there’s a good chance that a currency may increase significantly in value by next month or next year, why would you use it to buy goods now? According to Mike Porcaro, this possibility makes it seem unlikely that bitcoin will ever become significantly less volatile.
“Gold is a great analogy to use when thinking about the future of Bitcoin,” he said. “Like gold, BTC has a set of important attributes but also experiences volatility, making it difficult or inefficient to use as a form of payment.”
However, other people – particularly those more involved with Bitcoin – disagree that bitcoin’s volatility is at a level that prevents it from being usable as a means of payment.
“But for remittance really, transferring bitcoin takes 1 confirmation for exchange-to-exchange,” said Bitcoin developer Nicolas Dorier. “The price change in 10 min is unlikely to be very problematic to justify using a stablecoin instead.”
(However, there are multiple cases when BTC dropped several percent in 10 minutes).
As Dorier added, many people may not be bothered or inconvenienced by a slight fluctuation in bitcoin’s value, particularly if they convert out of bitcoin soon after receiving payment. “But on my side, if I get paid for a service and I receive +/-3% randomly, I don’t really care. If I care I would use a float.”
There’s also the view that BTC will become less volatile in the future, particularly as its market expands and as its capitalization increases.
"As bitcoin inevitably moves towards becoming an established asset class with a market capitalization far exceeding that of its current valuation, we could see it also becoming less volatile,” said Paolo Ardoino, Chief Technology Officer at Tether and Bitfinex.
Either way, Ardoino doesn’t see BTC and stablecoins as competitors, even if one may currently be more appropriate for payments.
“Tether owes its life to bitcoin,” he added. “Tether is successfully offering a useful and liquid token as a compliment to bitcoin, the world’s biggest and premiere cryptocurrency, and not as a competitor to bitcoin."
For some, stablecoins could never really be a serious competitor to BTC. Why? Well, because regulators are unlikely to permit pseudonymous stablecoin payments for much longer, particularly if stablecoins do become more popular.
As the American Institute for Economic Research’s JP Koning wrote in November:
“So for the sake of maintaining neutrality, I wouldn’t be surprised to see regulators put an end to pseudonymous stablecoin usage. Stablecoin issuers will only be able to give out addresses to people who have passed through some sort of know-your-customer process.”
Nicolas Dorier agrees with this analysis. He told Cryptonews.com, “Governments and regulators can suddenly crush a stablecoin by going after the issuer.”
Lastly, stablecoins will be stable only for as long as the fiat currencies to which they’re pegged are stable. And with the Federal Reserve printing over USD 3tn since March, this scenario might not be so far-fetched.
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