In such volatile times, provoked by the Covid-19 crisis, people often look for stability. The cryptoasset community is no different and many investors are looking at using stablecoins to do just that.
Cryptoassets have not escaped the COVID-19-induced volatility that has plagued traditional markets, leading to a sell-off in bitcoin amongst others. Instead of selling into fiat, investors have opted to go into a USD-pegged stablecoin such as Tether so that they can remain within the crypto ecosystem and avoid the costly fees transferring back into dollars. However, this injection of liquidity into a usually illiquid market coupled with selling pressure, as investors look to move back into other cryptoassets again, means prices are diverging from the underlying pegged asset. This has raised the question, how stable are stablecoins?
One of the key benefits of some stablecoins is that they enable investors to hold specific tokens tied to their own currency, whether that’s Tether with the US dollar, GBPX with Pound Sterling or JPYX with the Japanese Yen, which we have on our dedicated crypto exchange eToroX
The problem seems to lie in liquidity (doesn’t it always…).
Two things to note here. Firstly, how much liquidity can providers bring from traditional markets? If we see more usage of platforms that aim to bridge the traditional investment world with the new, like eToroX, and subsequently pool liquidity, we’d be less likely to see a divergence in price between stablecoins and their pegged equivalent. Secondly, the introduction of more Central Bank Digital Currencies (CBDCs) could also help stabilise prices and encourage greater convergence.
Fed stimulus could’ve taken advantage of CBDCs
The Fed announced that it is rolling out an absolutely enormous $2tn stimulus package to combat the financial impact of the Covid-19 pandemic. I’ve talked about central banks issuing their own digital currencies and right now we have the kind of situation that blockchain technology and digital currencies would excel in. By creating a ‘Fed wallet’, which could be verified by using people’s social security number for example, the central bank could send funds directly to each person without the need for commercial banks. Therefore, the Fed could instantly and simply issue US citizens with the financial stimulus announced.People would then need a platform to use their crypto to pay for goods and services – perhaps this is where projects like Facebook’s Libra could come in?
Direct economic stimulus, sometimes known as ‘helicopter money’, is a modern solution to a financial problem, and modern solutions often need modern technology to implement. Digital currencies are just that.
Yes bitcoin is a hedge, but not for health pandemics
There has been media noise as to whether bitcoin and other decentralised currencies can be seen as safe haven assets. Some have noted, unfairly in my view, that bitcoin has underperformed in this crisis, despite supposedly being a hedge for such events. But we must remember bitcoin was designed as a geopolitical hedge, not against a global pandemic. It’s worth noting that gold, the safe haven to end all safe havens, also dropped alongside equity markets at the height of the crisis.
With its original purpose in mind, bitcoin has reacted to monetary policy announcements in the way we would expect. Bitcoin price is increasing as people flock to it, protecting them from inevitable inflation associated with unlimited quantitative easing. Do not let those that misunderstand bitcoin say it is not working.
Whale Alert shows big players aren’t slowing down
I mentioned recently the Whale Alert bot (@Whale_Alert), which reported large amounts of Tether being minted. It happened again last week, with $300million USDT this time. This could signify a willingness from the big cryptoasset players to remain in the ecosystem and potentially biding their time for the opportune moment to move into other cryptos. Watch this space.
Cryptoassets are subject to tax, but don’t let it be taxing
Lastly, the 5th of April sees the end of the tax year for the UK. As with other types of investments, cryptoassets are subject to tax rules. The onus is on individual investors to calculate our own gains and losses so eToro has made this process a bit easier by developing a crypto tax calculator.
By Simon Peters, Market Analyst at eToro