The volatility of crypto assets’ values has always been one of the roadblocks for their widespread adoption. To solve this issue, the first stablecoin was born — USD Tether. Soon after, as the reputation of USDT grew in scandals, many new alternatives started emerging in the market. In fact, there are more than 57 new arrivals, according to a recent report by Blockchain.
What exactly are stablecoins and how do they help?
The simplest way to put it is that a stablecoin’s value is pegged to a stable asset, such as US Dollars, Euros, gold, or other assets with stable values. They represent safe heaven for crypto investors’ portfolio holdings in the case of a market crash as we’ve witnessed in the past year. Not all stablecoins are the same, though.
There are various types of stablecoins, depending on what keeps their price stable. The report from Blockchain summarizes them in two main categories — asset-backed and algorithmic. As the name might suggest, the asset-backed stablecoins are mostly centralized and backed by fiat, cryptocurrencies, other stable assets, such as gold and silver. On the other side, algorithmic stablecoins, also known as seigniorage-style, are decentralized by nature and rely on no real-world collateral. Instead, the value of the coin is determined solely by its algorithm.
The fiat-backed stablecoins solve the volatility challenge by pegging one-to-one each coin with a certain amount of some stable asset. An example would be Tether, each USDT is backed by $1 or so they claim. Algorithm-backed cryptocurrencies seek to solve this problem by controlling their money supply through monetary policy. Basically, they rely on the software to adjust the available coin supply on the market, essentially ensure its price remains stable. One could argue that algorithmic stablecoins are technically digital central banks.
USDT: Clouded in mystery
Until recently, the predominant player in the game was USD Tether, initially known as “Realcoin.” As the coin and the company behind it have been in many scandals throughout their short lifespan, people began to ask questions and dig deeper into. After the most recent dispute at nearly $3 billion market cap, Tether’s total supply, and market dominance began to decline as a clear contrast to its competitors’ rising circulating supply. Right now, the market cap of USDT is about $1.8 billion.
Beyond USD Tether: A More Stable Future?
As the dominance of USDT declines, new players enter the game. According to data from The Block, the most used stablecoins after USDT are TrueUSD, USDC, PAX, followed by Gemini Dollar and Dai. While TrueUSD has been around for a while, other more recent coins, such as USDC, issued by Circle, and PAX have grown at a much faster rate.
Unlike Tether, some of these new market entries comply with certain regulations to ensure their safety. Some of the requirements that projects, who have acquired permission from the New York Financial Regulator to launch a stablecoin, such as PAX and Gemini Dollar, will include strict recordkeeping and monitoring as well as adopting “risk-based controls.” These requirements prevent money laundering and various other illicit activities.
Recently, Binance, one of the cryptocurrencies’ biggest exchanges announced they would be creating a new stablecoin market, essentially renaming their USDT section to USD? and adding new stablecoins as base pairs for trading. One of the platform’s newest entries is namely PAX.
On Thursday, Nov. 1, Tether released a letter attributed to Bahamas-based Deltec Bank, stating that, as of the end of Oct. 31, 2018, ‘Tether Limited’ owns an account with a ‘portfolio cash value’ of $1,831,322,828. According to a Bloomberg publication, so far, the bank has declined to comment on the claim.
After months of FUD, weeks of declining USDT circulation and market cap, a purge of assets, and various rumors — this bank attestation appears to be raising further concerns rather than taking care of existing ones.
Deltec’s ‘due diligence review’ of Tether Limited’s assets
According to the statement on USDT’s website, to become the bank’s customer and acquire the presented bank attestation, Tether had to and will continue to undergo a long due diligence review of their portfolio holdings.
As mentioned in the publication, the review included a complete background check of Tether’s shareholders, ultimate beneficiaries and executives, a full analysis of their processes, policies, and procedures for compliance, as well as an affirmation of the 1:1 USD-peg claim.“The acceptance of Tether Limited as a client of Deltec came after their due diligence review of our company. This included, […]. This process of due diligence, was conducted over a period of several months and garnered positive results, which led to the opening of our bank account with this institution. Deltec reviews our company on an ongoing basis.”
Signature, but no name?
Neither the name or position of the company executive whose signature is on that bank attestation, are known. Some critics have even gone out to compare the statement to a similar one from Marmota Bank, and their style of writing appears to be quite similar.
According to Bloomberg, Deltec spokeswoman Melanie Hutcheson has refused to confirm or dismiss Tether’s claims when contacted via phone a day after the publication.
USDT’s market cap descent
As of the time of this writing, USDT market cap has plunged from over $2.8 billion to below $1.8 billion since mid-October. This bear market was set off by a sudden decline in Tether’s price to below $0.90 on some exchanges. The drop, totally unexpected for most, promoted panic among the unsuspecting holders and traders, leading to a sell-off.
On Oct. 24, Tether announced the purge of half a billion USDT, leaving their treasury fund with about 466 million. Actions such as this one have left some critics to speculate whether the reduction in supply was intended to ensure the success of Deltec Bank’s due diligence review.
Here we take a look at Cryptocurrencies and see how they compare by percentage of total volume and market. As expected Bitcoin leads the way at 42.4% of the total cryptocurrency market followed by Ethereum at 17.8%. So much for the flippening amirite. After that we see the usual suspects, LTC, BCH, EOS, XRP, in the single digits. Interesting to see Bitcoin dominance still above 40% when many predicted this would be the year other coins closed the gap, especially during the bear trend we’ve been in for most of 2018. Which coins can move up the ranks in the next 12 months? EOS launch has been a disaster so far. Can Litecoin keep its place as silver to Bitcoin’s gold?
Cryptocurrency Circulating Value
In terms of cryptocurrency volume traded on exchanges, Bitcoin dominates slightly less at 31%. This could be the result of lesser volume from mostly BTC focused exchanges like Bitfinex and Bitmex and altcoin exchanges like Binance launching more altcoin to fiat pairs. This could be a trend to keep an eye on for the rest of the year as regulation starts to pave the way for regulated exchanges and more fiat on-boarding services become available.
Cryptocurrency Daily Volume
Finally we take a look at the cryptocurrency volatility chart. This chart shows that volatility measured as a % of price over the course of the last 180 days courtesy of the crew at sifrdata.com. This bear trend is taking its toll but the volatility is also what makes crypto markets so different from traditional assets.
Cryptocurrency Volatility Chart
I wonder how many years til the crypto markets stabilise some…at least for large market cap coins.
“Just when I thought I was out, they pull me back in!” Just when we think the bulls are gathering the troops, the hackers (and exchange) bring us back down. One of the largest exchanges in the world, Bithumb, based in South Korea was recently hacked for $31 million. How did that affect the Bitcoin price? Not much. We are still holding that $6000 support, fam.
The top 5 in terms of marketcap remains unchanged but all showed weekly growth as per the Livecoinwatch image below. The overall cryptocurrency market in the past week increased from $279bln to $289bln representing a 3.5% increase in the past seven days. Your bags are not the only ones suffering. EOS is the only in the top 5 which did not recover as well week to week, likely to do with the news of the “constitutional crisis” their block producers are having.
Bitcoin: BTC dropped 4% to $6772 in the past week as of this post. Even with the news of the Bithumb hack Bitcoin held that strong $600 support and showed signs of life. How many more Bart patterns are we going to see this year? It wouldn’t surprise me if “The Bart” becomes an accepted crypto technical analysis pattern in the future.
Ethereum: Aaaaand it’s back. Or is it? ETH grew 10% over the past week settling at $537 as of this post. I don’t really see many people saying “buy ETH at $500, you will never see it again” on the social media anymore. I wonder why?
TETHER (USDT): Tether is back in the news this week so we figured we would highlight it in this weeks Dispatch. The idea behind Tether to have each USDT token backed 1:1 by USD reserves. By holding a US dollar for every USDT Tether token, Tether claim that the value is pegged to the USD and will remain stable. The very definition of a stablecoin.
This is great for people looking to secure profits from their holdings, and even better for day traders nobody wants to profit by exchanging one coin for another only to see both plummet in value. This is great idea, unfortunately the lack of transparency from Tether itself has many doubting each token is backed by a US dollar.
There is not much in terms of price to discuss, because Tether should never deviate from it’s value of $1. That’s not the case as you can see below. USDT has deviated from it’s 1:1 pegging of the dollar, most drastically when it came onto exchanges in February 2015 and again between April and June 2017.
What’s new at Crypto is Coming
Square Granted Bitcoin Trading License – Payment processing company Square has been granted a New York BitLicense, which enables them to operate a cryptocurrency exchange and allow New York residents to trade Bitcoin.
Total Dominance: The Story of Binance – The exchange has seen meteoric growth, reaching the highest volume of any exchange just six months after launch and valued at almost $2 billion within the same time frame, making it the fastest ever platform to reach tech unicorn status.
Crypto Facilities To Launch Litecoin Futures– UK cryptocurrency exchange, Crypto Facilities, is set to launch Litecoin derivatives contracts from Friday, June 22, according to rumours. The exchange will be offering both short and long positions with weekly, monthly, and quarterly maturities for LTC joining Bitcoin (BTC) and Ripple (XRP) futures. The exchange also added Ethereum (ETH) futures last month.
Underdog EOS Block Producers you should root for – The purpose of this piece is to highlight some of the best candidates at risk of not getting enough votes to earn a spot, and why you might want to support them with your vote, to have a more decentralised and stronger EOS network.
EOS leaving exchanges vulnerable to hacks? – Whoa, that’s a lot of heat for EOS aint it? Crypto enthusiast Emin Gun Sirer put up an interesting thread today on twitter predicting a massive exchange hack in the next 12 months .all because of potential EOS vulnerabilities.
Explaining Augur for Beginners (infographic) – Augur is highly touted project in the cryptocurrency industry. With its launch date approaching, we decided to take a closer look at how the platform actually works. At its core Augur is a prediction market built on top of the Ethereum Blockchain.
Goodbye, Denver Post. Hello, Blockchain – They left The Denver Post amid newsroom layoffs and interference in the editorial process by the newspapers hedge-fund owners. And now those reporters and editors are creating their own news outlet, The Colorado Sun.
We hope you enjoyed this weeks The Raven’s Dispatch! Don’t forget to sign up for our newsletter so you can receive notifications via email that a new Dispatch was released! Also if you have any interesting news you would like to submit contact us at firstname.lastname@example.org
The cryptomarket is full of stablecoins that aren’t… well, they’re not very stable
Volatile by nature, the market attracts people looking to capitalize on the wild upswings and downward trends seen in the space of hours, minutes, and seconds on the market every day that would make world headlines in the traditional financial markets.
The market cap of all cryptocurrencies is currently $345 billion. That’s a lot of money, but it’s dwarfed by the market cap of the stocks on the New York Stock Exchange which are worth almost $20 trillion.
Comparatively fewer traders means the market can be more easily influenced (or manipulated) and the price action can be notoriously skittish. Things can go very bad, very fast for people investing large amounts of money in day or swing trading, and the way some exchanges work, by the time a trader who sees a storm coming succeeds in cashing out their investment to fiat they might have pretty much lost everything, either eating the loss or being left holding the bags in the hopes that eventually the value will increase.
There have been horror stories about exchanges completely halting fiat withdrawals during periods where the whole market was going down. BitGrail famously only allowed fiat withdrawals during very narrow windows at inconvenient times for many users in the weeks preceeding the RaiBlocks/NANO loss of 15 million tokens worth about $150 at the time.
Does The Market Need Stablecoins?
In short, yes, and there are a number of reasons.
While price swings appeal to traders, cryptocurrency is more than just lambos and moon rockets (I know, I’m as shocked to learn this as you are). The technology allowing people to transact freely, instantly, and peer to peer across international borders is amazing and has huge social, political, and industrial implications. Using cryptocurrencies as actual currencies would be great, but mainstream adoption is being held back by intimidating price volatility.
People receiving wages in fiat currency often have to wait days to carry out transfers – getting paid in crypto would be great if it was possible to guarantee that the value wouldn’t dissappear overnight, and if it was possible to spend the cryptocuurrency in stores, and the implementation of a real stablecoin would help that process immensely.
Even for those more interested in the lambo side of things, it would certainly make things easier, right? A cryptocurrency with a fixed value (most projects working on it peg the value to $1 USD) that can be transferrred instantly. Users trading Bitcoin, for example, can buy in when the price is relatively low, watch it rise (hopefully), and when they feel they’re ready to cash out or they see the price falling, they can immediately cash out into a stablecoin and either cash out into fiat or hang onto it until they see an opportunity to buy back in. Timing is important, of course.
It’s the next best thing to actually allowing fiat trading pairs – or it would be if it worked, that is.
For money to qualify as money, it needs to be a medium of exchange, a store of value, and a unit of account, and a stablecoin needs to have those properties as well.
There are a number of stablecoins currently on the market and in development, but the big players in the space at the moment have thier flaws. The top dog is Tether.
It’s worth a read in its own right for all the juicy scandals, but for now if you just want to know the answer…
No. You can not trust Tether.
Essentially the company has refused to release their bank statements or what bank they’re working with, and fired the auditor they hired to demonstrate to the public that the project was legitimate before the auditor could finish their job. The reason? They said they were “too thorough.”
What’s the alternative? To get into stablecoins and why some of them aren’t up to scratch, we need to know how they work.
How Do Stablecoins Work?
Take your average crpytocurrency: If people suddenly start buying more of it, sellers start to slightly increase the price, often leading to a domino effect and crazy price swings that day traders make their living off of. It’s not uncommon for currencies to see a ten or fifteen percent price fluctutation in one day, something that would give stock traders a heart attack in the traditional markets.
With a stablecoin, the last thing you want is for your coin to move. If something goes wrong in the market, people will suddenly start buying more of the stablecoin, but it can’t change in value, that’s the thing. Market laws would usually dictate that slight increase in price happening immediately, but not here – the coin can’t budge or it doesn’t work. The USD has an inflation rate of around 2 – 3% which is much more manageable than crypto inflation/deflation.
To achieve this, stablecoins are backed by outside assets. Here are the three main strategies:
Fiat-collaterized: Stablecoin projects pegged to the value of $1 USD actually have $1 USD for each token. Tether claims to be fiat collateralized, but have refused to present evidence. TrueUSD are Tether’s main competitor, but the token didn’t have enough liquidity to remain stable after launch and ended up trading at $1.39 after being listed on Binance.
Not very stable!
Crypto-collateralized: This is what it sounds like – the currency is pegged to the value of another cryptocurrency. Maker, for example, is backed by Ether. The downsides of this are that it’s slow, complicated to maintain, and of course reliant on the continued existence of Ether as a valued asset. It is however a decentralized and transparent project, unlike competitors like Tether.
Non-collateralized: These tokens aren’t backed by anything, and instead use smart-contract-released algorithms to restrict or expand the supply to counter price fluctuation, much like a central bank does with fiat.
Coins are often pegged to the value USD or the value of gold, but it’s worth noting that other projects are commodity-collateralized as well. Vault, for example, are collateralizing the value of their token with gold – the token will be pegged to the USD but backed by gold bullion extracted by the company’s established gold mining operations, a commodity-collateralized solution that may prove promising.
How does it remain stable?
Smart contracts on the blockchain issue commands based on the data received that restrict or expand the supply of the currency, much like a central bank does with fiat currency (but on a blockchain, because blockchains make everything better, am I right?)
While many projects are centralized, which to some defeats the purpose of cryptocurrency, others are decentralized and operate purely on pre-programmed smart contracts. It remains to be seen how the stablecoin experiment will work out and which method will end up being the most succesful, but one thing is for sure – the closer we get to introducing a trustworthy stablecoin to the market, the closer we get to mainstream adoption, which is great for idealists and moon-bound lambo enthusiasts alike.