“Bitcoin” was the first cryptocurrency created, and it is now the most valuable and well-known of all the cryptocurrencies. It was first launched in 2009 by a computer programmer under the pseudonym, “Satoshi Nakamoto”.
Volatility of Cryptocurrencies
The highest price paid for one Bitcoin was nearly US$69’000 in November 2021. As of 28 September 2023, the value of Bitcoin stood at around US$26’77o. The massive instability of Bitcoin and other crypto currencies, is one reason why Governments around the world are developing their own digital currencies.
- The transaction that first gave Bitcoin monetary value was in October 2009, when a Finnish computer science student, known online as “Sirius”, sold 5’050 coins for US$5.02, giving each Bitcoin a value of US$0.0009 each, with the exchange taking place on PayPal.
- An investment of US$1’000 in Bitcoin in July 2010 would now be worth more than US$35 million today. In comparison, an investment of US$1’000 in a fund tied to the S&P 500 index, would be worth around US$2’500.
- Experts predict that Bitcoin (and other Cryptocurrencies) can achieve price stability when a large portion is used for practical purposes rather than speculation.
- In the meantime, Governments around the world say the instability of crypto currencies is one reason for them to develop their own digital currencies, referred to as Central Bank Digital Currencies or CBDC’s
- But opponents to CBDC’s, claim there are other more sinister reasons for governments to want to move into digital currencies:
- Governments have played a central role in the creation and distribution of money for a long time.
- They minted coins and printed bills and have been heavily involved in the banking industry through regulations and more.
- The decentralisation of currency though cryptocurrencies has led to governments around the world looking at ways to also enter the digital currency space without sacrificing (their) control over monetary policy.
- Opponents to CBDC’s claim however, that Governments could control the digital spending of its citizens, controlling what and how much they spend their money on. To a certain extent, this already happens in China with its “social credit system“
Enter the “Stablecoin”
The pioneering of Stablecoins was the brainchild of two prominent figures in the blockchain industry, Charles Hoskinson and Dan Larimer. So how does it work?
- Stablecoins are a type of cryptocurrency that always hold a stable price and are crucial for crypto investors. One such coin is “Tether“, which currently has a market cap of more than US$2 billion.
- Stablecoins differ from cryptocurrencies in that they “backed” by other organisations to guarantee their stability. The various types of Stablecoins are:
- Fiat-backed: These are backed by Fiat-Money and one of the common forms of Stablecoins. In simple terms it is a digital version of Fiat-Money.
- Commodity-backed: This type of coin is backed by commodities such as gas, oil, gold, valuable metals etc.
- Crypto currency backed: a mix of crypto-currencies back up these types of Stablecoins to spread the risk.
- Seignorage style: These types of Stablecoins are backed by algorithms to burn or add cryptos to stablise the coin.
We can now find many Stablecoins on exchanges around the world. These coins are slowly gaining in popularity and re-establishing people’s faith in digital currencies.
Why have Stablecoins been introduced?
Many cryptocurrency exchanges don’t deal with dollars or Fiat Money. Thus, it becomes quite difficult for investors who want to invest in cryptocurrencies with hard cash. Stablecoins can be a solid substitute for dollars, and it will help people invest in other cryptocurrencies. The theory is to mimic the nature of dollars and use that to sell Bitcoins and get cash.
Some further examples of Stablecoins:
- TrueUSD is Fiat-backed, and an alternative to Tether.
- Gemini dollar or GUSD. This was introduced by the Winklevoss twins – Cameron and Tyler (reportedly the original founders of Facebook).
After the history of instability with cryptocurrency and the announcement from international governments that they are working on introducing CBDC’s, Stablecoins seem to offer an alternative form of digital currency, designed for daily usage rather than investment and speculation and backed by various resources, other crypto currencies and algorithms to ensure stability.
Currently, no specific regulations for Stablecoins exist in Switzerland. Depending on their design features, Stablecoins must therefore be analysed on a case-by-case basis to determine whether any such licence is required.
Time will tell if Stablecoins become the new leading form of digital currency or if Government backed CBDCs will eventually take over. But with many financial institutions now taking cash deposits back via ATMs, the age of stable digital currency is definitely coming of age.
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