Volatility has become part and parcel of the crypto market, as a majority of new entrants are attracted by the significant amount of money that they can earn from capitalizing on the instability of the prices of cryptocurrencies. Even though extreme volatility remains one of the biggest attractions of cryptocurrency, it has also been detrimental to the outlook of the technology, particularly as crypto pushes for mainstream successes.
In this article, I will discuss the age-long crypto volatility narrative and factor in the emergence of stablecoins, which are the exact opposite of what we have come to expect from a typical digital asset.
The Story of Crypto’s Volatility
One of the most prominent narrative when it comes to the crypto market and the valuation of digital assets is volatility. Crypto is an extremely volatile asset, as seen in the unprecedented price swings that led to the bull market of 2017. Bitcoin reached an all-time high $19,000 as new investors flocked in to get a share of the largesse of the crypto market. Truth be told, the volatility of prices brought about by speculation is perhaps one of the major selling points of crypto to millennials, which a study shows make up 60% of participants of the crypto market. Volatility multiplies the opportunity to make profits due to persistent fluctuations alien to conventional markets due to the generational divide.
Experts have concluded that the volatile nature of cryptocurrencies is speculation driven. And regardless of its current appeal to traders, the extreme instability of the crypto market does more harm than good. For one, it creates an avenue for nefarious entities to sponsor coordinated pump and dump schemes and take advantage of the speculative-driven crypto community. You will agree that the recurring cases of crypto scams have had devastating effects on whatever momentum generated in 2017 when cryptocurrency became a buzzword. Besides, the extremely volatile nature of crypto has indirectly contributed to the susceptibility of the market to manipulations cited as one of the reasons why a Bitcoin ETF is not forthcoming.
Perhaps, the most documented drawback of highly volatile cryptocurrencies revolves around the failings of digital assets as regards to everyday payment functions. It is proving difficult for the crypto community to convince the global economy of cryptocurrency’s viability as an alternative to fiat money because it lacks the sought of stability attributed to the latter. Since crypto is unstable, merchants and crypto participants are not particularly thrilled to use crypto for their daily needs. The crypto market requires some sort of mechanism to acquire stability to penetrate the mainstream economy. This is where stablecoins enter the fray.
Finding Stability in The Most Unlikely Market
The concept of stablecoin came to life when Tether launched as one of the most notable cryptocurrencies pegged to the US dollars. Ever since the introduction of this novel project, we have witnessed the proliferation of the concept, as countless of other fiat-backed stablecoins have found their way to the crypto market.
However, stablecoins pegged to one fiat currency or the other are not the only ones making waves. On the contrary, cryptocurrencies relying on the value of mineral resources have also made names for themselves. One of the latest additions to this class of stablecoins is Sudan Gold Coin SGC, poised to negate the volatility-prone nature of the crypto market by pegging crypto to gold, known for its reliability and stability, as well as create a payment network enabling easy, cheap, and low-risk transactions. Hence, the development team has designed the stablecoin in such a way that 1 SCG will always represent the value of 0.0002 oz of gold. The team has implemented a commendable system, ensuring that every SGC issued has its value backed by an untouchable gold reserve.
While stability is one of the core motivations of the SGC project, the network has, however, infused an element of decentralization, which I must say is lacking in a majority of stablecoin projects found in the crypto space. To this end, the platform has incorporated a transparent and automated stabilization policy to govern the creation and destruction of tokens whenever the price is at risk of falling way below or above its underlying asset.
Another stablecoin that fits into this class is the newly introduced Pax Gold. In the case of Pax Gold, each token is pegged to one ounce of gold, and token holders can access all of the details establishing their ownership of physical gold stored in a vault in the UK. GoldMint is another fine example. This initiative is blockchain-enabled stablecoin adopting physical gold and/or ETFs as underlying assets establishing the value of the token. The unique use case of GoldMint is that it allows users to access loan facilities by depositing their gold as collateral.
Furthermore, one of the most remarkable additions to the stablecoin, MakerDao, offers stability by pegging tokens to the US dollars through the over-collateralization of cryptocurrency, particularly Ethereum. What this means is that for every $1 worth Dao token available in the market, the platform holds, via smart contracts, Ethereum valued at $1.5 as collateral to compensate for volatility that might cause the price of ETH to plunge.
Although stablecoins hold the key to maintaining stability in a volatile terrain, it is, however, important to mention that a majority of stablecoin projects forego decentralization for the opportunity of providing crypto infrastructures entrenched in low-volatility. Hence, crypto participants skeptical about the intricacies establishing the prices of stablecoins might find it a tad difficult to trust the viability of these cryptocurrencies.
Which Is Better? Stablecoins Or Volatile Cryptocurrencies
Having discussed vital points for and against both variations of cryptocurrencies, it is clear that participants’ choices depend on their prevailing crypto activity. Traders will favor volatile cryptocurrencies for the obvious reasons, while those looking to adopt crypto as a payment method will appreciate the essence of stablecoins. Nonetheless, when it comes to the efficacy of the crypto market as a whole, there is no doubt that entities enabling stability are paramount to crypto mainstream adoption.