By tying blockchain technology to fiat currencies, stablecoins are trying to be the solution to cryptocurrency volatility. Hannah Murphy reports for the Financial Times:
While stablecoins are less enticing investments for risk-hungry speculators than other cryptocurrencies, proponents argue users get the best of both worlds: the low volatility of fiat currencies together with the advantages of digital currencies, such as fast international payments, availability to anyone with an internet connection and no need to go through the banking system.
And many believe their potential goes beyond facilitating the purchase of fast cars. In recent months, the market for these coins has exploded, buoyed by hopes they could be the stepping stone that enables the wider adoption of cryptocurrencies as a medium of exchange.
“As well as institutions coming in, stablecoins might be the key that unlocks the market,” said David Mercer, chief executive of LMAX exchange, a UK foreign exchange venue that trades $4tn a year.
There are now about 120 stablecoin projects under way, according to Stable Report, a crypto research group.
While they represent a small fraction of the wider cryptocurrency market, the value of all stablecoins stands at about $3bn, and their issuers have attracted some $350m in venture capital funding to date from the likes of Bain Capital Ventures, Google Ventures and Andreesen Horowitz, a report by cryptocurrency wallet provider Blockchain found.
Among the most popular stablecoins are those said to be backed by the US dollar, one for one. Many consider these as easy-to-use digital cash or an “IOU” for $1, rather than a substitution for real money.
“There’s no need to replace the US dollar that’s universally accepted,” said Chad Cascarilla, chief executive of Paxos, a blockchain company that recently launched its own dollar-backed stablecoin. “You’re upgrading the way in which it moves rather than the value it represents.”
Some experts are also developing stablecoins that are not backed by assets but stabilised using algorithms that control the currency supply.
Advocates also hope that in the long term, offering products and services powered by stablecoins will prove lucrative.
“Insurance, lending . . . these are some of the categories that could start to grow into the trillions [of dollars],” said Garrick Hileman, head of research at Blockchain, a crypto wallet company. “The total addressable market is huge. That’s part of the reason so much VC money is going into the space.”
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Jeremy Jones, CFA
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