Long time readers know I’ve occasionally commented on the crypto-currency phenomenon, although generally from the outside looking in. However, there’s a new wrinkle showing up in crypto-currency land, and I’m really baffled by it. From The Switch (WaPo), back on November 1:
There’s a new form of cryptocurrency gaining traction among fans of digital cash.
Unlike bitcoin, which has seen its price swing wildly from as high as $19,000 last year to its current level hovering around $6,200, this emerging class of cryptocurrency aims to maintain a stable price — one, single U.S. dollar — at all times.
A cryptocurrency whose price never fluctuates might sound nonsensical, particularly to entry-level traders who want to profit off a cryptocurrency’s appreciation. But many in the industry say the rise of “stablecoins” has in fact been instrumental for active investors — and could represent a crucial steppingstone to the future of money. …
“I don’t know whether the price of that crypto is going to go up or down, but it’s almost certainly not going to be the same as it is today,” said Josh Fraser, co-founder of the cryptocurrency start-up Origin Protocol. “That introduces the problem [for] either the buyer or seller . . . as part of that transaction.”
That’s why many in the industry now see stablecoins as a big opportunity that could fulfill much of bitcoin’s original promise as a medium of exchange.
I tried to do some research on stablecoins, but ran into a jungle of jargon that made little sense to me. I wonder if there’s a really good, readable explanation of how stablecoins bring anything positive to the table. The WaPo article has a lot more, including an early attempt at stablecoins:
But not all was well: In the past several weeks, Tether [provider of an version of stablecoins] has been hit by a massive crisis of confidence. On some exchanges, Tether began trading at well below a dollar, which is not supposed to happen for a currency whose sole purpose is to maintain a solid peg. While the precise reasons for the slippage remain unclear, investors have engaged in a sell-off, and Bitfinex — a major exchange that shares the same management as Tether — took hundreds of millions of Tether coins out of circulation. In one month, Tether lost almost $1 billion in its market cap.
This sort of result leaves me with a suspicion that a purely private form of digital currency may not be an optimal solution to the problem of providing a stable fiat currency. I may be wrong, perhaps a large enough provider can provide stability simply through size.
But it may turn out that the traditional source of fiat currency, government, with all its flaws and vulnerabilities, may still be the best solution. I don’t disagree with the originators of crypto-currency that government is sometimes really undesirable, given how inflation can destroy an economy when a pack of amateurs is running the government, but the winds of the free market may be even less beneficial for a currency.
Libertarians occasionally cite economist Joseph Schumpeter’s remark about creative destruction and how through that process, progress (however you wish to define it) is made. Somehow, applying this to the currency the economy runs on doesn’t seem like the wisest of decisions.
