Bitcoin’s instability won’t be cured by Stablecoin: Berkley Professor

Bitcoin’s instability won’t be cured by Stablecoin: Berkley Professor 22891
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Aakash Athawasya
Sep 12, 2018 at 10:00 AM

Despite its stability in value and popularity among crypto-investors, the dollar-mirroring Tether (USDT) is still deeply flawed and won’t be the magic cure that everyone was hoping for, said Professor Barry Eichengreen, an economics professor at UC Berkeley. This resounding opinion comes just a few days after the launch of the Gemini dollar (GUSD) by the Winklevoss twins, Cameron and Tyler Winklevoss.

Investors' reaction to the Stablecoin has been divisive. Some investors are pro-GUSD as it forms a link between the two predominant currencies in their portfolio, i.e. fiat and digital. Other investors see little to no significance of the addition of the Stablecoin to their investments, as it is unlikely to trade at a surplus against its underlying currency.

Eichengreen, in an op-ed for the UK’s prime newspaper The Guardian, specifies the lack of pragmatism that the Stablecoin employs. This, in turn, fails to help solidify Bitcoin’s value. “Viable monies provide a reliable means of payment, a unit of account, and store of value. But conventional cryptocurrencies, such as Bitcoin, trade at a wildly fluctuating price, which means that their purchasing power- their command over goods and services- is highly unstable. Hence they are unattractive as units of account.”

He further explained how Bitcoin may not be a viable means of “purchasing power” since it is unlikely that grocery stores would price their products in the crypto. Moreover, it is not a feasible means of payment for a long-term employment contract.

The professor points out that stablecoins "are not mere vehicles for financial speculation", referencing their link to the dollar. But at the same time, he doubts its viability. He further explains the three facets of the Stablecoin, the fully collateralized, partly collateralized and uncollateralized.

Fully Collateralized

Expense is the main problem under the fully collateralized Stablecoin. The cycle of inflow and outflow begins with attracting one dollar from an investor and then issuing the same to another, through a dollar bank account. This implies that a fully liquid, (stable) government-backed unit of money is being traded for a cryptocurrency which lacks universal belief and is “awkward to use.” He cities its use among criminals, particularly money launderers and tax evaders.

Partly Collateralized

This form of Stablecoin is where the platform holds the coin and the dollars in an equal ratio so that the risk is off-set. He compares this to the macro-economic policy employed by monetary policymakers and several central banks, citing their reserve policies. If, due to uncertainty or trade doubts, an investor decides to sell of his coin holdings for liquid money, following which other investors do the same, the platform will have to purchase the coins using the dollar reserves so that the price doesn’t plummet. Eichengreen compares this to a “bank run.

Uncollateralized

Crypto-coins are accompanied with crypto-bonds, which will be given to investors for coins if the price of the coins fall. The bonds are issued at a discount.

This, again, will depend on the growth of the platform - a grave uncertainty. The professor predicts that more bonds will have to be issued to ensure the coin’s value doesn’t fall further, intensifying interest obligations.

Eichengreen further explains that such flaws will not get past a central banker or a person capable of understanding the speculative assertions of the market.

Gemini's Entrance

This academic critique of the Stablecoin comes days after the Winkelvoss twins' announced the launch of the Gemini dollar, a “trusted and regulated digital representation” of the American dollar. They peg the Gemini (GUSD) to be a competitor to the Tether (USDT).

Interestingly, Tether (USDT) has not had the best relationship with the public, with concerns being raised regarding the coin's close association with the exchange Bitfinex and lack of transparency.

 

See also: Tether runs over Cardano; positions itself as #8 in the crypto market

See also: Crypto-trading active in China thanks to Tether [USDT] & VPN: Report

 

Image via Shutterstock

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