Saturday , May 21, 2022

Searching for Stability

Have you used Bitcoin or some other cryptocurrency lately? Or have you used one at all? If you did, was it worth the same at the time of the transaction as it was when you obtained it? Chances are, its value had fluctuated, maybe by a very wide margin.

Bitcoin, the largest (in terms of market cap) and best-known of the cryptos, is notorious for these big swings in value between when the coin was generated and when it was spent—or even from day to day or week to week. To take a recent example, Bitcoin recorded a value of $64,863 at 10:30 a.m. on Nov. 13, but at 10 p.m. five days later it was logging in at $56,016, a loss of $8,847, or 13.6%, in a matter of five-and-a-half days. That sounds more like a share of stock than a medium of exchange.

And that’s been the rub with most cryptocurrencies. Holders who want to spend their coins can’t be certain hour-by-hour of the total value of their holdings, as they could be with a stack of dollars or a card backed by a stack of dollars. This is what has made holders of Bitcoin treat the digital currency more like an investment. But that wasn’t the original intention for this money. It was supposed to function as a digital stand-in for folding money, able to be swiftly transmitted from a mobile wallet to any seller anywhere in the world.

What’s the solution? Some have argued for stablecoins, a digital currency whose value can be linked to an existing national currency, typically the U.S dollar. In this way, the coin enjoys all the ease and convenience of digital safekeeping and transmission but without the volatility of a Bitcoin. Since the first stablecoins appeared in 2014, the market has seen the emergence of scores of these coins, so much so that their total market cap has soared past $140 billion.

But as our Networks story points out, this popularity hasn’t come without problems. The federal government, concerned about how some issuers are backing their coins with loads of commercial paper and other instruments besides cold, hard cash, is looking to impose a menu of regulations to safeguard holders in case of a run. Some observers fear over-regulation, which could stifle stablecoins just as they’re edging toward mainstream usage.

That would render the coins less useful as a medium of exchange, and throw the digital-transactions market back onto cards—plastic or virtual. In our opinion, that would be a shame. Let’s hope the regulators can find a balance between user protection and the innovative benefits offered by stablecoins.

—John Stewart, Editor, john@digitaltransactions.net

 

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