How do we assess the value of something? To date the world’s most valuable painting sold at auction is Salvator Mundi, believed to be by Leonardo da Vinci. It was bought by the Abu Dhabi Department of Culture for USD 450 million. That’s for a painting that experts can only guess was painted by the Italian master, and which a team of skilled forgers could produce a perfect likeness of at a fraction of the price.
How do we define value?
Value is tricky thing to define. One dictionary definition is: “The extent to which a good or service is perceived by its customer to meet their needs or wants, measured by the customer's willingness to pay for it. It commonly depends more on the customer's perception of the worth than on its intrinsic value.”
Another way of putting it is that value is a combination of demand and scarcity, and this was one of the principles behind the creation of bitcoin. What wasn’t predicted was the wild volatility of bitcoin and all the other cryptocurrencies which have followed. While markets were rising, then rising some more, people were perfectly happy with the spectacular increases in value, but the falls have been equally sharp.
Part of the problem with crypto is that it is unrelated to anything ‘in the real world.’ Tokenized offerings are a brilliant way of raising funds, and – if successful – their tokens can then be used by investors within the ecosystem of the ICO. Outside of that they can be traded on the exchanges for other coins, but the whole market is still prone to alarming shifts in value.
The emergence of stablecoins
Into this volatile cryptoworld has come the concept of stablecoins. As yet, stablecoins only form 2% of the entire cryptomarket, however they have the potential to act as ‘shock absorbers’ to the wilder surges. They do this by being backed by fiat currencies, typically national currencies, but also precious metals and other assets. The reasoning is that investors can turn to stablecoins to keep their own assets relatively safe, venturing out to the market when conditions are right. As market sentiment seems to be increasingly conservative, the era of the stablecoin has therefore arrived, and we can expect to see large upticks in market share in the near future for the whole stablecoin sector.
Stablecoins are not born equal however, and there are wide differences between their offerings. Some even seem downright dubious, chief among them being Tether, the sector leader with 80% of the market. Tether has a market cap of USD 2 billion, and pledges one-to-one backing in US dollars for the USDT token. Sounds great, but there is documented proof that Tethers have been created without dollar backing, and there is no clarity about the actual level of the reserves. We’re told that the backing is one-to-one, but where’s the proof? Lack of transparency is therefore a key issue with this stablecoin, and there’s also no legal right for investors to retrieve their assets. Say what?
Yes, that’s correct. We can cross our fingers and make a wish, and trust that Tether - or almost any other stablecoin – will never go down. If it does however, don’t expect stability.
It's Stablecoin Week at Cointelligence! Check back daily for new articles examining stablecoins and their role in the crypto economy.