The launching of stablecoins was seen as a palliative measure for reducing the effect of the crisis of Bitcoin from recently, and some even described it as a temporary replacement for an ETF. However, the professor of Economics at UC Berkeley, named Marry Eichengreen, said that stablecoins are not the way out of the crisis.
Stablecoins are backed by another currency – USD
Even though stablecoins are cryptocurrencies, they are supported by another currency (USD) or any substance of value like gold. They are utilized for everyday transactions as of their low volatility, global usability and the fact that they are not owned by any central bank. These properties actually make them more suitable for everyday spending than Bitcoin or some other cryptocurrencies which have no fiat backing.
But, professor Eichengreen classified stablecoins into three groups, saying that they are not the best of investments because of the specific weaknesses which are unique to each category. As he spoke, fully collateralized stablecoins are expensive in that they require a reserve which is equal to or more than the coins in circulation, to keep the market stable.
According to him, this is not affordable for most of the organization, and it makes it almost unacceptable for proper regulation by the government.
Uncollateralized stablecoins are the worst class
And about partially collateralized stablecoins, the professor stated that investors may not be confident enough to put their money where only 50% of the circulating coins are backed by a fiat reserve, a situation which can lead to the collapse of the peg if the company wants to retain the value of the stablecoins by repurchasing them from some investors with the limited reserve.
According to the professor, the third, as well as the worst class of them is the uncollateralized stablecoins. As the name implies, they have no collateral backing them, and the company just relies on the law of demand and supply in order to keep the coins valuable.
Interest may come from uncertain profits
The platform also issues stablecoins and bonds which it actually buys back from the investors at a discount when the price falls by giving out more relationships that are meant to lure the investors into spending from promised interest.
This interest is also expected to come from uncertain profits which the company may make in the future, making it both the platform and investors susceptible to lose if the platform does not grow.
While Tether or USDT was around for a short time, it seems that the arrival of the GUSD of Gemini is what made the professor to speak concerning stablecoins. While some may see them as a good investment option, he believes that it is a dangerous trap which investors may innocently fall into.