The crypto world is an unstable and volatile place, constantly shifting between bull market and bear market periods. Some investors are enjoying this and others not so much. Mass adoption is the ultimate goal for cryptocurrencies, but a stable cryptocurrency is needed in order to accomplish that. Right now cryptocurrencies are behaving more like stocks and less like currency with their incredible volatility. They give more incentives to trade with them, not to pay with them.
This article is just an opinion, but it brings some great points of view, facts about how the economy works and current problems that cryptocurrencies face and need to be addressed. The crypto world is still pretty young and is constantly changing. A lot will change in the following years and we are witnessing history in the process of making. If you are new to cryptocurrencies read our Ethereum and Bitcoin guides.
Volatility and trading come hand in hand
The concept of creating a stable cryptocurrency is complicated. Many have tried to create such a coin and failed. In time the crypto markets will get well established, leading to a more stable nature of the top cryptocurrencies. The best projects may have more stable valuation by then, but that doesn’t translate to a less risky environment. Actually the markets may become aggressively competitive, like the Forex market. The crypto markets are becoming increasingly more competitive, because they are some of the easiest to trade on. This is because of few reasons:
- Traders can see trends clearly
- Some of the lowest trading transactions fees out there (not in every market)
- Great percentages of Return of Investment (ROI)
- Scaling profits
- A never sleeping market that is always open for business
These are the perks of cryptocurrency trading, but there are lots of cons as well. Trading is very risky and one should venture only if you know what you are doing! There is a need for stability and at some point in time it needs to be established. But how can you make a coin that would stay stable?
What is a stable cryptocurrency?
The reason for the big fluctuation of cryprocurrency prices is the supply and demand. The supply is more or less fixed but the demand is always changing due to people’s behavior and speculation. A normal currency can have a broad use, it can store value and be a unit of exchange. You can’t have a currency that isn’t backed by value. Fiat currencies are collateralized by assets and gold. If they weren’t, they would depreciate fast.
Though most banks are printing money at some rate, the US dollar is the only currency that can be printed without limit from the US central bank. But the problem with printing infinite amounts of money is that they will depreciate, without being backed by value. The US dollar is experiencing something like this. Compared to the stable Euro, the US dollar is losing value at an alarming rate. A solution for this problem is currently being talked about and is planned for the future. But a solution for the stability of cryptocurrencies is something else.
A stable cryptocurrency needs to not have exposure to the performance of cryptocurrencies in particular, but to follow the global outlook of the economy. It needs to perform similarly to existing fiat currencies and to maintain the benefits from the blockchain technology like full decentralization, complete transparency of solvency and low running costs.
Any currency needs stability in order to be used as a trusted medium of exchange. Regular people will not trust a currency that can gain and lose 30% value in a day. A stable currency needs a stable ecosystem and a good foundation from which it can self-corrects.
How can you make a stable cryptocurrency
You can’t just “print” coins and make them money from thin air. For a cryptocurrency to be stable in the long run, it needs to be collateralized by a highly diversified portfolio with all of the traditional asset classes in order to have value behind it. If done so, assets like stocks, fiat currencies, bonds, commodities and all other asset classes from regional economies will become tokenized.
Also the coins must have a stable rate with fiat currencies. Let’s say a rate of 1 coin = 1 USD. This type of coin would let everyone day trade and would lower the risk of losing money. Putting your money in that coin would mean that your money is safe and stable, without worrying about the market’s turbulence and fluctuations.
This will also allow for the coin to be used like a currency. Right now cryptocurrencies can’t be used as currency, because of their unstable nature. People can’t use a currency for payment that increases and decreases in value in short periods of time. Also merchants will not be happy if a customer pays 1000$ in crypto and after an hour they become 600$. They will be happy if they become 2000$ though, but this instability will not last long.
Actually stocks and commodities will just be as bad as cryptocurrencies if there weren’t a lot of value and an actual business behind them. When the economy weakens, the prices of these assets fall or threaten to fall. In case that we manage to tokenize and bring these assets to the blockchain, but in the same time the economy weakens, this will drive up the cost of capital and will slow down the velocity and the circulation of money. This will result in a far worse economic state and conditions.
On the other hand, there are safe haven assets like US treasury bonds that could potentially work, because they appreciate in value during economic downturns. But the biggest question is how to bring these assets to the Ethereum blockchain or any other, without bringing all the problems with them.
Furthermore, with a stable cryptocurrency you can have remittance, ATMs, currency conversions and many more financial services with lower fees than fiat currencies, so there is still a long road ahead.
A cup of water in the ocean
Medias tend to overlook certain details and like to dramatize things. So let’s end it with an analogy and put the cryptocurrency market into perspective against fiat currencies. Let’s say you have a small boulder. If you throw it in a small puddle, it will make a splash, deforming the puddle and sending ripples through it for some time. The puddle will feel the effects of this event. Throwing the same boulder in the ocean will cause it to disappear in the blink of an eye, sending small ripples that have almost no effect on the ocean itself.
The ocean is the established legal economy of currencies and the puddle is the cryptocurrency world. Factors that make almost no marks on fiat currencies can shake things up in the smaller digital currency world. The crypto world is a fairly new industry that is really small in comparison. Fluctuations in value, major investments and even theft are going to look pretty big in the current context. These events and others may look impressive on the outside and can easily be exaggerated by the media. Statistic numbers that suit the narrative are used to scare people. But context is king and we should always question statistic information before jumping to conclusions, because statistics can be interpreted differently.
That’s why it is too early to jump to conclusions like “the cryptocurrency world is too unstable to be viable”. It has been only five years of existence and one or two years of mainstream spotlight. It is too soon to doubt this fairly new and untested industry and It is safe to say that it still has a long road ahead. A lot of problems, like security and market stability, will be fixed in the future. Viable solutions are researched and implemented as we speak and a stable cryptocurrency will exist some day. Things will smooth out as the markets mature and more people invest in them. As the industry grows it is important for people to look at what is happening with an unbiased point of view and to ignore all the misinformation out there!