Why should you avoid stable stocks as investments?

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Today, Gemini has launched the Gemini Dollar. This cryptocurrency is indexed to the dollar, but built on the blockchain to be transferred to the Ethereum network. It is also likely to be subject to a higher regulatory standard than other stable standards, such as Tether. In the end, it is a useful innovation, but a weak investment option.

An important bridge

Stablecoins could play an interesting role in creating a bridge between digital currency and currencies like the US dollar. There is clearly a technologically valuable role to play here. The US dollar is a standard accounting unit used almost everywhere. For example, pricing things in Bitcoins can create complications for simple and easy-to-understand contracts. For example, if I tell you that a bottle of Coke costs $ 2, you probably have a pretty clear idea of ​​what it means, if I tell you that it costs 0.00032 Bitcoin, then mental math is a little more complicated. In addition, tomorrow a Coca-Cola will probably still be $ 2, but there may not be 0.00032 Bitcoin if the price of Bitcoin changes. In this way, stablecoins can create a platform for further innovation in currencies and digital contracts. They offer a simple link to the world of fiduciary money.

Nevertheless, in a year of slowdown in which many cryptocurrencies fell by half or worse at the time of writing, some of them welcome the low volatility they offer. This is the wrong conclusion to draw. This is not where the value of stablecoins lies. First, in the last 12 months, almost all financial assets are less volatile than cryptocurrencies. To say that stablecoins are less volatile than other cryptographic assets is not a statement. Almost everything is less volatile than many cryptographic resources today.

Problems with the US dollar

There is little reason to own stable funds as investments. The main problem is simply that the US dollar itself has always been a very bad investment. Ironically, decentralization is one of the interesting promises of cryptocurrency. Basically, the government can not create more cryptocurrency when they have bills to pay. It's a good thing. When governments print extra money, it dilutes the value of money. For example, if you held a dollar in 1918, a century later the dollar could buy the equivalent of 6 cents in 1918. It's a huge drop. A dollar is always a dollar, of course, but what you can buy with this dollar is much less.

The value of currencies tends to decrease steadily, some faster than others. In fact, the United States is one of the best examples. Zimbabwe shows what can happen when excessive money is printed and the value of the currency falls to zero. Basically, by binding a stable currency to the US dollar, you force it to be a relatively bad investment because its value comes entirely from a relatively bad investment. Yes, the US dollar may be less volatile than many cryptographic holdings and even many other fiduciary currencies. Nevertheless, being better than several potentially negative investments does not make something a good investment. In addition, unfortunately, by placing a stable currency in a currency with the problem of centralization, some of the decentralized benefits of most cryptocurrencies are lost. Again, stablecoins are a useful intermediate technology step, but offer little more than the investor.

Asymmetry

Stablecoins therefore have a role to play in financial innovation, but there is little point in attracting them as investments to ensure their stability. The asymmetry inherent in stablecoins should also be considered. Yes, a stablecoin can retain its value over time. However, it is highly unlikely that a stablecoin trades with a premium on the underlying asset it tracks. Nevertheless, a stablecoin could be negotiated at a reduced price. This could happen for reasons of lack of trust or, in some cases, lack of use. Therefore, you have an undesirable configuration where, at best, your stable dollar is worth a dollar, but in the worst case, it is trading less. As a result, with stablecoins, you are only potentially taking downside risks. This is different from traditional cryptocurrencies, where there is more risk symmetry, which means that they both can increase or decrease plausibly, as history shows. If all goes well, the regulatory environment of the Gemini dollar and the processes that flow from it work as expected, but again, if there is no solution, it is not necessary that it works. On the first day, there is little reason to take these risks.

A stablecoin, especially in the early days of its introduction, is as if you were throwing a coin and your results were that you get your money back and the tails you lose. Normally, with prospects for increased investment and compensation or hopefully for exceeding the downside risk, but stablecoins have little benefit, buying an "au pair" stablecoin or the same price as the value of the instrument if the asset tracked is an undesirable investment. Nevertheless, over time, some stable banks may be able to establish their credibility, which will probably be beneficial for financial innovation if they are robust.

Stablecoins therefore have an important role to play in innovation in currencies and digital contracts. However, that does not mean you have to own them today. The prospect of apparent stability by being tied to the US dollar is not the same as a good return, although this may seem to be the case in the current cryptographic market.

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Today, Gemini has launched the Gemini Dollar. This cryptocurrency is indexed to the dollar, but built on the blockchain to be transferred to the Ethereum network. It is also likely to be subject to a higher regulatory standard than other stable standards, such as Tether. In the end, it is a useful innovation, but a weak investment option.

An important bridge

Stablecoins could play an interesting role in creating a bridge between digital currency and currencies like the US dollar. There is clearly a technologically valuable role to play here. The US dollar is a standard accounting unit used almost everywhere. For example, pricing things in Bitcoins can create complications for simple and easy-to-understand contracts. For example, if I tell you that a bottle of Coke costs $ 2, you probably have a pretty clear idea of ​​what it means, if I tell you that it costs 0.00032 Bitcoin, then mental math is a little more complicated. In addition, tomorrow a Coca-Cola will probably still be $ 2, but there may not be 0.00032 Bitcoin if the price of Bitcoin changes. In this way, stablecoins can create a platform for further innovation in currencies and digital contracts. They offer a simple link to the world of fiduciary money.

Nevertheless, in a year of slowdown in which many cryptocurrencies fell by half or worse at the time of writing, some of them welcome the low volatility they offer. This is the wrong conclusion to draw. This is not where the value of stablecoins lies. First, in the last 12 months, almost all financial assets are less volatile than cryptocurrencies. To say that stablecoins are less volatile than other cryptographic assets is not a statement. Almost everything is less volatile than many cryptographic resources today.

Problems with the US dollar

There is little reason to own stable funds as investments. The main problem is simply that the US dollar itself has always been a very bad investment. Ironically, decentralization is one of the interesting promises of cryptocurrency. Basically, the government can not create more cryptocurrency when they have bills to pay. It's a good thing. When governments print extra money, it dilutes the value of money. For example, if you held a dollar in 1918, a century later the dollar could buy the equivalent of 6 cents in 1918. It's a huge drop. A dollar is always a dollar, of course, but what you can buy with this dollar is much less.

The value of currencies tends to decrease steadily, some faster than others. In fact, the United States is one of the best examples. Zimbabwe shows what can happen when excessive money is printed and the value of the currency falls to zero. Basically, by binding a stable currency to the US dollar, you force it to be a relatively bad investment because its value comes entirely from a relatively bad investment. Yes, the US dollar may be less volatile than many cryptographic holdings and even many other fiduciary currencies. Nevertheless, being better than several potentially negative investments does not make something a good investment. In addition, unfortunately, by placing a stable currency in a currency with the problem of centralization, some of the decentralized benefits of most cryptocurrencies are lost. Again, stablecoins are a useful intermediate technology step, but offer little more than the investor.

Asymmetry

Stablecoins therefore have a role to play in financial innovation, but there is little point in attracting them as investments to ensure their stability. The asymmetry inherent in stablecoins should also be considered. Yes, a stablecoin can retain its value over time. However, it is highly unlikely that a stablecoin trades with a premium on the underlying asset it tracks. Nevertheless, a stablecoin could be negotiated at a reduced price. This could happen for reasons of lack of trust or, in some cases, lack of use. Therefore, you have an undesirable configuration where, at best, your stable dollar is worth a dollar, but in the worst case, it is trading less. As a result, with stablecoins, you are only potentially taking downside risks. This is different from traditional cryptocurrencies, where there is more risk symmetry, which means that they both can increase or decrease plausibly, as history shows. If all goes well, the regulatory environment of the Gemini dollar and the processes that flow from it work as expected, but again, if there is no solution, it is not necessary that it works. On the first day, there is little reason to take these risks.

A stablecoin, especially in the early days of its introduction, is as if you were throwing a coin and your results were that you get your money back and the tails you lose. Normally, with prospects for increased investment and compensation or hopefully for exceeding the downside risk, but stablecoins have little benefit, buying an "au pair" stablecoin or the same price as the value of the instrument if the asset tracked is an undesirable investment. Nevertheless, over time, some stable banks may be able to establish their credibility, which will probably be beneficial for financial innovation if they are robust.

Stablecoins therefore have an important role to play in innovation in currencies and digital contracts. However, that does not mean you have to own them today. The prospect of apparent stability by being tied to the US dollar is not the same as a good return, although this may seem to be the case in the current cryptographic market.