Stablecoins vs Derivatives


This post is by Jeff Carter from Points and Figures


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If you don’t know what a stablecoin is I will define it for you.  From Investopedia; Stablecoin refers to a new class of cryptocurrencies which offer price stability and/or are backed by reserve asset(s). In recent times, stablecoins have gained enough traction as they attempt to offer the best of both world’s – the instant processing and security of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies. Here is a link to a list of them.

Let’s propose something.  Suppose I offered to trade some gold for your cryptocurrency.  What happens?

Gold prices go up and down, and so do stablecoins.  Gold has more value since more people know what it is. However, it’s probably tougher to turn gold into hard fiat currency.  Of course, crypto goes up and down too.  Stablecoins that can be exchanged for fiat currency more stable than other coins.

However, I think they are going to be useless in the long run.

For centuries, man has diversified risk using futures, options and over the counter derivatives.  I don’t see any reason why the crypto world won’t be any different.

Economist John Cochrane wrote about Basecoin in April of 2018. I don’t think he is wrong.  If a stablecoin is tied to a fiat currency, why don’t I just transact in the fiat currency?  I can easily use Paypal to transact in anything I want.  Despite people’s frustration with Paypal and their policies, it’s still easier than crypto.

I am willing to be wrong.  But, in the meantime if I held Bitcoin I’d rather hedge in a regulated futures market than in a stablecoin tied to my local fiat currency.  With futures and options, I have a lot of latitude.  I can fine tune my hedge.  I can roll my hedge.  I can remove it.  The market is liquid, and market makers are more than happy to help me get in and out of positions.

As soon as a token gets enough underlying liquidity, listing a futures market to hedge is a great idea and far easier than creating a stablecoin.

Sometimes engineers over-engineer stuff.