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BENGALURU : On 30 May, investors witnessed a sharp $1,000 decline in the price of bitcoin. However, this was not the first time that bitcoins acted erratically. Cryptocurriencies like bitcoins have always been both the joy and bugbear of crypto-investors, having gained notoriety for their whale-induced high jumps and sharp dips led by institutional investors.

Given its volatile nature, bitcoins are now finding a tough rival in stablecoins. Reason: Many stablecoins are pegged at a 1:1 ratio with certain fiat currencies such as the US dollar or the Euro, which can be traded on exchanges. Other stablecoins can be pegged to other assets such as gold or even to other cryptocurrencies.

Stablecoins are steadily gaining traction the world over. For one, according to a March report '2019 State of Stablecoins' released by Blockchain.com, the total of market value of all stablecoins more than doubled in the last 12 months--up from $1.4 billion at the start of 2018 to $3 billion currently. Further, the total stablecoin market value share has grown to 2.7% of all cryptoassets, up from 1.5% in September 2018.

Stablecoins are nothing new and have been actively used for the past four years. The total market value of all stablecoins is approximately $3 billion, or 2.7% of the total market value of all cryptoassets. Tether continues to dominate stablecoin trading volume, commanding approximately 96% market share.

Stablecoins, according to the report, are already an important part of the digital assets ecosystem--Tether (USDT) is the second-most actively-traded cryptocurrency at approximately 75% of bitcoin (BTC) daily trading volume in 2019--up from 57% in 2018.

A single currency unit of the largest stablecoin, Tether (USDT), is intended to be equal to one US dollar, and for the roughly three years that Tether has been actively traded in public cryptocurrency markets its exchange rate has proven to be generally reliable in delivering on this design objective.

There are two broad types of stablecoins. According to Garrick Hileman, Head of Research, Blockchain, while asset-backed stablecoins reduce price volatility by using fiat currencies like the US Dollar, algorithmic stablecoins rely on computing logic to govern the supply of currency to achieve stability, mimicking the mechanisms at work by central banks.

However, most cryptocurriences are yet to find favour with many governments (the Reserve Bank of India, for instance, does not encourage their use and sale of bitcoins is taxed in the country if converted to Indian rupees). Speaking on the safety of investing in stablecoins, Hileman says much depends on which stablecoin (there are a little over 50 version of them in circulation) an investor chooses.

"Stablecoins like the Paxos Standard, which Blockchain recently added to its Wallet, are an incredibly safe. These tokens are regulated by the New York Department of Financial Services. When a Paxos token is created, the US dollar used to create it is stored in regulated banks in the United States and audited on a regular basis. Other stablecoins don’t have the same controls or mechanisms to protect users, but many of the largest stablecoins provide a much safer alternative to many volatile fiat currencies across the world," he points out.

Blockchain (the underlying technology of all cryptocurrencies), according to Hileman, has made extraordinary progress over the last decade. Today, there are over 30 million users of cryptocurrencies. "It took the internet two decades to achieve the same level of use and adoption as bitcoin has achieved in just 10 years. Progress tends to look slower while you’re in the moment, but when you look at the sophistication of real world use cases and broad level of education around cryptocurrencies, the progress is remarkable from where we were just a few years ago," he notes.

On 9 May, Bloomberg reported that "...according to Facebook insiders, the blockchain group (at Facebook) is developing a stablecoin..." and the first country to test it would be India.

Hileman is "optimistic that in the near future India will be one of the top countries to embrace stablecoins. They fall in-line with the current government's leaning towards building a cashless Indian economy, and stablecoins can be a great contributor to the rapidly growing digital payments market in India. There's a pressing need for stable value to settle things like cross border remittances, peer-to-peer transfer, and rent payments".

According to Sathvik Vishwanath, CEO and Co-Founder of Unocoin--cryptocurrency trading and blockchain company, there are about 30 lakh people who are still holding on to their bitcoins. He insists that stablecoins are "not an alternative but they do bring the advantages of cryptocurrencies to fiat currencies--like that of providing instant and free transactions". Uncoin has its own stablecoin called TUSD, which is a dollar-linked stablecoin since India does not have any stablecoin that is linked to the Indian rupee.

"There are so many exchanges for crypto assets but investors won't be able to cash out because of specific country restrictions. So they (investors) could covert the crypto to stablecoins," he says.

According to the Blockchain.com report cited above, "...stablecoins are more complementary than competitive with other major cryptocurrencies like bitcoin or ether. Indeed, many stablecoins rely on the security, compatibility and infrastructure provided by cryptocurrencies like bitcoin and ether. Overall, stablecoins are best viewed as a form of ‘infrastructure’ or foundational layer for cryptoassets that will generate immense value for the overall digital assets ecosystem".

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