Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
In the past few years, stablecoin utility has extended out of the niche enclosure of the cryptocurrency industry and into the global economy. Below are several real-world use-cases for stablecoins around the world.
In essence, stablecoins are digital currencies collateralized to the value of an underlying–and typically stable—asset. More often than not, a stablecoin's price is pegged to fiat currencies such as the US dollar, but can also include assets such as gold and bitcoin. Certain mechanisms, including the aforementioned collateral, ensure its stable price.
Coupled with the inherent benefits of digital currency, such as transaction speed and cost-efficiency, stablecoins derive the bulk of their utility from stability.
Within a 2019 study by the European Central Bank (ECB), the stability of stablecoins was put to the test. The ECB compared the volatility of several popular stablecoins, with some of the top cryptocurrencies. The average volatility—expressed as the annualized average seven-day standard deviation of daily returns between December 2017 and July 2019— came in at 10% for Tether (USDt), and 27% for DAI. Meanwhile, counterparts such as bitcoin cited average volatility of around 69%.
Tether's result appears to line up with the average volatility of the US Dollar, which according to statistics from NYU stern's volatility laboratory (V-Lab), comes in at around 8%.
Bearing the most useful hallmarks of bitcoin without the price swings allows stablecoins to enjoy a litany of use-cases. By and large, the most comprehensive use for stablecoins is as a hedge against bitcoin volatility.
A report issued in April by the University of California Berkeley's Haas Blockchain Initiative confirmed this, suggesting that stablecoins perform a vital role in the cryptocurrency economy as a safe haven. Substantiating their find, researchers pointed to the recent premiums on stablecoins during the coronavirus panic in March.
Indeed in recent times, demand for stablecoins has gone through the roof. Per data from cryptocurrency analytics firm, Coinmetrics, the total market capitalization of the top stablecoins breached $9 billion in 2020.
The avoidance of volatility isn't just confined to the bitcoin markets, either. A global flight to the perceived safety of the US dollar is also driving demand. The ease of entry rendered by stablecoins makes them a useable mechanism for investors looking for exposure to the US dollar. Moreover, stablecoins negate the obligation for institutions and costly intermediaries, extending additional utility to the unbanked population.
Cross-Border Remittance Solutions
According to reports, Chinese merchants operating in Russia are frequently harnessing stablecoins such as USDT to move money home to China in an effort to avoid strict capital controls on foreign currency.
Chinese importers are buying up to $30 million in USDT per day via over the counter trades in Moscow. Previously, merchants traveling between Russia and China would employ bitcoin. However, following the bear market of 2018, many switched to stablecoins to evade price fluctuations.
In the same vein, stablecoins are also utilized within remittance and cross-border payments—and not just to avoid capital controls.
According to the World Bank, remittance flows to low-and middle-income countries grew to $529 billion during 2019—a near 10% increase on the previous year. Incredibly, prices charged for the privilege of sending money cross border range between 7% and 11%. Stablecoins stand ready to offer a faster and cheaper alternative, and officials are starting to heed the message.
Within a report by the G7 Working Group, remittance stood out as one of the most valuable uses of stablecoins in the broader economy. Not only does the report acknowledge the sluggishness of cross-border legacy systems but also the 1.7 billion unbanked, of which stablecoin initiatives could assist.
Stablecoins are also supporting those in counties with high-inflation. The International Monetary Fund (IMF) forecasts that weak local currencies will be "shunned" in favor of stablecoins pegged to stronger foreign currencies. This is already being witnessed in Venezuela, where hyperinflation has ravaged the national economy to the point where the Venezuelan bolivar has lost 95% of its value.
As a result, several stablecoin-centric initiatives have popped up. Among them is remittance start-up Valiu. Contrary to the many USD-pegged stablecoins on the market, Valiu has designed a bitcoin-backed synthetic dollar.
One of the inspirations for the project was the emergence of a risky black market for remittance—the result of increased capital controls on traditional remittance services such as Western Union. Perceiving the need for a safer alternative, Valiu devised the so-called "cryptodollar" intending to allow Venezuelans access to bypass hyperinflation via access to stable assets.