Stablecoins are emerging as trustworthy, reliable assets with the potential to bridge the gap between traditional and crypto finance. In September 2020, the stablecoin market valuation reached a major milestone, surpassing $20bn in total value. This marks a nearly 300% Year-to-Date surge which is a surging development for the stablecoin market and a reflection of the growing demand for stablecoins as a viable payments and investment solution. The total supply of Stablecoins in circulation has hit record levels with nearly $8 billion added to the aggregate supply in the past three months. This means the total stablecoin supply nearly doubled in Q3 of 2020. With these astonishing figures, experts can’t help but dub 2020 as ‘the year of the stablecoin’.
Offering certainty in a volatile market
The role of stablecoins in driving forward the mass adoption of cryptocurrencies boils down to some key features of these digital assets. As stablecoins are pegged to real-world assets, they do not spur speculative investing and are naturally more stable than cryptocurrencies such as Bitcoin. Bitcoin is notorious for its volatility: a characteristic that limits its current use cases. Bitcoin was valued at $900 in January 2017, later soared to $20,000 the following December to only plummet to $3,200 in December 2018. Bitcoin’s volatility has sometimes limited their mainstream adoption. But at times of high volatility in crypto, investors can turn to stablecoins to withstand market moves.
Given that stablecoins are designed to maintain their market value over a long period of time, they are an ideal safe-haven asset during periods of dramatic fluctuations in cryptocurrencies. Further to this, they can be held outside of jurisdiction or bank entities, allowing for fast, seamless use. Stablecoins provide easy, more secure access to commonly used store-of-value items, for example currencies and commodities. Major crypto players utilize stablecoins as a more predictable and less volatile cryptocurrency and believe that this will catch the attention of institutional investors in particular.
Payments are a key use case of stablecoins, with more related uses emerging. Several companies and tools have begun accepting cryptocurrencies as a form of payment. As we have already established, high volatility remains to be the largest drawback of cryptocurrencies for payments. Look no further than Bitcoin Pizza Day in 2010 to demonstrate the downfalls of this volatility, when Laszlo Hanyecz used 10,000 Bitcoins to buy pizza, which was worth $40 dollars at the time, $6 million in 2013, and $3 million in 2014. It could be a challenge to use a volatile currency to pay salaries, store assets, collect debt, or in any other economic function. Stablecoins however, offer the same benefits of blockchain and custodianship minus the volatility, giving them the ability to integrate crypto usage into everyday life, such as purchasing a coffee, paying wages or paying a bill.
The potential of stablecoins is being explored not only by crypto-enthusiasts across the world, but also by governments. For example, Stablehouse recently launched a test pilot program for a digital stimulus token in collaboration with the Government of Bermuda, aiming to demonstrate the viability of digital tokens for the purchase of food and essential products and services through participating merchants and retailers. In this case, the Government of Bermuda can issue economic stimulus, while limiting the use of it on non-essential purchases. Governments famously developing and/or researching national digital currencies include China and the U.S., with additional rumours circulating around digital pegs of fiat currencies in the United Kingdom. Further to this, the European Central Bank is reportedly seriously considering a digital euro.
Stablecoins offer primary advantages of Bitcoin such as transparency, immutability, and security, but take it to new levels with their added stability. Offering a tangible solution for the main pitfalls of Bitcoin, for example, positions stablecoins as a viable entry point into the digital asset space for traditional institutions, governments, and enterprises. Beyond this, their peg to a real-world asset can be considered the most effective method of digitised investments in traditional commodities like gold, oil, or fiat currencies, bringing these age-old assets into the modern world.
These benefits and use cases have had an impact on the stablecoin market, flooding it with investment and new opportunities, as the wider digital asset space comes to recognise the potential of these digital currencies. Stablecoins have the power to drive forward mass adoption of cryptocurrencies, drawing traditional assets onto the blockchain and pulling cryptocurrencies out of their niche industry and into the real world.