A boy asked his crypto-enthusiast dad for 1 BTC for his birthday.
Dad: What? $8,924?? Do you know that $7,269 is a lot of money? What do you need $10,231 for anyway?
If you’ve spent some time in the cryptocurrency market; you’ll most likely have seen the joke above or one of its many variants. The joke humorously draws attention to the inherently volatile nature of cryptocurrencies and how one can never be sure what any crypto is worth at any time relative to fiat currencies.
Stablecoins address the volatility risk of cryptocurrencies
Stablecoins are a new type of cryptocurrencies issued on a blockchain, decentralized, programmable, and designed to have stable values. The stability of stablecoins is entrenched in the fact that their value is pegged against other assets. Asset-backed stable coins could be pegged against fiat currencies, gold, precious metals, or other cryptocurrencies. The price-value dynamics of stablecoins won’t ordinarily fluctuate with the FOMO, FUD, and demand-supply manipulations that make cryptocurrencies unpredictably volatile.
The volatile nature of cryptocurrencies is of the one key talking points that critics often hammer when denouncing cryptocurrencies. They often argue that the volatile nature of crypto makes it unsuitable for use as a unit of account, store of value, or means of exchange.
Unfortunately, the volatility has largely kept consumers and merchants away from using crypto has a means of payment. The volatility has also kept many risk-averse retail investors away from making cryptocurrency investments.
Below are five reasons stablecoins might be instrumental in unlocking the mass-market adoption of cryptocurrencies.
Attracting new cryptocurrency investors with portfolio protection
Stablecoins provide new investors with the confidence to test the crypto waters because they can easily protect their portfolios against market corrections. Thankfully, new investors will feel at home on cryptocurrency trading platforms such as eToro where they can get started with cryptocurrencies through a clean and simple UI while accessing a community where they can glean insights on trading strategies and market trends.
The market cap of the entire cryptocurrency market is valued at around $246B but it is only a minute fraction of all the investments in the world and it is a practically non-existent fraction of the money in the world. Only a small fraction of risk-loving investors has cryptocurrencies in their portfolios and many potential investors have had their minds poisoned by the bias of critics such as James Dimon and Warren Buffet.
If new investors can access market insight, trading knowledge, and portfolio protection; their quest for profit will trigger another wave of mass-market adoption of cryptocurrencies from Wall Street.
Facilitating the adoption of crypto for everyday payments
The Tether USDT, for instance, is pegged at 1:1 to the USD; hence 1 USDT will always be worth $1. This inherent stability could encourage merchants to start accepting cryptocurrencies because they don’t have to worry about losing a part of their sales to volatility before the end of the business day. Consumers will also be comfortable buying things with stablecoins because they no longer need to deal with the agony of buying stuff with crypto only for the value of that crypto to surge after a few hours and thereby leaving them with the feeling that they’ve overpaid.
Protecting traders against market corrections
One of the major drivers of the growth in cryptocurrencies is the trading activity of risk-seeking traders who don’t mind being early adopters in an unproven asset class. Much of the cryptocurrency transactions can still be traced to trading activities, but 10% to 20% daily gains/losses are common occurrences in the cryptocurrency market.
In contrast, a 10% correction is a newsworthy event on Wall Street; hence, many Wall Street traders consider cryptocurrency trades to be too risky beyond their comfort zones. In addition, the malevolent action of Bitcoin whales often suggests that the market can still be manipulated and stop losses are often powerless against such manipulations. Stablecoins help traders lock away their gains to protect their portfolios from the shockwaves of market corrections.
Activating network effects for cryptocurrencies across DApps ecosystems
One of the key highlights of cryptocurrency is its decentralized nature powered by the underlying Blockchain technology. Fundamentally, Blockchain technology is still in an embryonic stage and nobody can say for sure how it would change the world over the next decade. Stablecoins can make it easier for many of decentralized applications, DApps built atop different Blockchain to scale and ultimately trigger a mass-market adoption of crypto. For one, many DApps are P2P based and stable coins could easily facilitate the peer-to-peer transfer of value without needing fears about who bears the volatility risk.
Providing a measure for standardization to enhance cross-chain transactions
Stablecoins can also encourage and facilitate cross-chain transactions across different Blockchain by serving as a stopgap or escrow currency of sorts. When people want to trade with tokens issued on different blockchain s such as Ripple’s XRP and Stellar Lumen XLM; it not usually easy to determine how the trade should be conducted and users often end up having to convert their original token to BTC so that they can buy the target token in order to conduct the transaction. The risk, however, is that BTC is also volatile and the trade could have cost you more or less than you bargained for by the time it is finally settled. Stablecoins can make it easier to conduct such cross-platform trades because they retain their value irrespective of what happens in the general cryptocurrency market.