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Will Cryptocurrency Hybrid Stablecoins’ Be The Next Big Investment Craze?

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The white paper published to detail the technical and conceptual details of Bitcoin, the digital-only currency free from any central bank manipulation, detailed the ambition that the original cryptocurrency would found a more egalitarian international monetary system. Bitcoin hoped to replace the current fiat monetary system that has been in place since the end of the gold standard.

The result of the Bitcoin-led digital revolution of money would mean ordinary workers no longer seeing their savings eroded by the inflation caused by central banks printing money and the cut taken by the oligarchy of all-powerful financial services needed to administer the system. A greater level of control over personal data and financial privacy would also be returned to the individual. A side effect was the birth of blockchain technology, the P2P immutable digital ledger technology use cases of which are being trialled across a wide span of industries.

However, as so often turns out to be the case, the nine years since the launch of Bitcoin have played out slightly differently to the original vision. Bitcoin’s characteristic of providing a high level of transaction anonymity meant it first gained traction as a medium of exchange on the dark web – a shadow internet that scrambles identifiers such as IP addresses and only accessible through a specialist browser. It’s primarily a black market for illegal goods and services that could be described as embodying a range of shades of dark.

Bitcoin did, however, gradually achieve wider recognition and a degree of more mainstream traction over the years. As well as users of dubious motivation, there was also a growing army of other proponents who supported the argument that the fiat monetary system is flawed and that Bitcoin offered an alternative. A handful of established companies such as Microsoft started supporting Bitcoin payments and despite being beset by volatility Bitcoin’s value rose as demand increased.

Then last year Bitcoin went on a spectacular bull run, rising in value from around $1000 (£779) to $20,000 (£15,580) between January 2017 and the early days of January 2018. Sentiment that Bitcoin was about to go mainstream, further catalysed by 2 major, regulated commodities and futures exchanges preparing to launch Bitcoin futures contracts turned hype into an investment bubble. Millions of individuals around the world started investing online in Bitcoin, further accelerating its climbing price.

But the bubble burst. Demand for Bitcoin futures has proven to be minimal and the cryptocurrency’s price has fallen to back below $4500 over the course of the year. The huge energy resource the P2P ledger technology eats up to run and Bitcoin’s continued volatility mean that even many of the faithful are beginning to slowly come to the conclusion the cryptocurrency isn’t really a practical alternative to fiat currencies at this stage. Would you be willing to pay the Bitcoin equivalent of $2 for a coffee in the morning and $2.15 or even $2.50 for the same coffee later in the afternoon?

However, the degree of traction that Bitcoin has achieved, even if it never completes its journey to become an alternative to the pound, dollar, euro or yen, has raised awareness of weaknesses in the fiat system and how the kind of blockchain technology Bitcoin and other cryptocurrencies run on could provide an answer. But there is also a growing acceptance that a practical transition towards a cryptocurrency alternative won’t work unless exchange rate volatility is moderate. The technology also has to be further refined to make it more energy and processing power efficient as well as demonstrating scalability. Regulators and governments also need to be courted if traction is not to be faced with legal and regulatory roadblocks at every turn.

Many believe the answer might something which has been dubbed ‘stablecoins’. Stablecoins are a kind of hybrid cryptocurrency that peg a digital currency to more mature, stable assets such as fiat currencies or commodities. It would be possible to, for example, buy a stablecoin for a pound and exchange it back at a later date for a pound again. Many now believe stablecoins could be the halfway house that allows cryptocurrencies to mainstream.

Stablecoins upgrade the technology of fiat currencies in a way that would potentially make currency transactions far more cost and time efficient by cutting out a chunk of the middlemen systems currently propping up digital financial transactions. If pegged to fiat currencies they wouldn’t, however, address the Bitcoin aim of negating the wealth erosion effect of inflation. But perhaps one step at a time is the only realistic option.

However, with as many as 120 stablecoin projects currently at various stages, is there a danger that we exchange one cryptocurrency bubble for the next? Will those naively investing online lose out again? Hopefully lessons have been learned and will not be forgotten quite so quickly but time will tell. 




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