Stablecoins: Safe or a MASSIVE Crypto Risk??
🤔 Stablecoin Overview 🤔
These are cryptocurrencies that are pegged one for one to the value of another asset. In most cases, this is a fiat currency like the US dollar Stablecoins are able to maintain their peg thanks to two separate mechanisms The first is decentralised stablecoins that rely on collateralised debt and smart contracts to maintain their peg The second are centralised and fiat backed stablecoins that hold a certain amount of cash in a bank in order to make sure the currency is backed one to one Stablecoins are also essential for the smooth functioning of crypto markets
😨 Stablecoin Risks 😨
Perhaps the most important of these is what is more generally termed a "run on the bank". Quite simply, it is a situation where all of those who have the stablecoin in question will rush to withdraw all at the same time. This could be as a result of some sort of lack of confidence in the stablecoin. Moreover, the reserves that are backing up stablecoins are not always completely liquid. There are also a number of sparks which could lead to this "Bank run" scenario on the market. These include regulatory crackdowns and other stringent actions.
😨 China & Tether 😨
Ever since China cracked down on Yuan-Bitcoin trading back in 2017, a massive market has opened up for USDT-Bitcoin trading. Over the past 4 years, the Chinese regulators have let it slide as the market mushroomed. However, they have begun a hard crackdown on crypto in the country. China now has a strong incentive to crack down on the trading of all cryptocurrency. Mass amounts of USDT being dumped on the market could hammer its price and drive it off the peg.
💁🏻♂️ Fears Justified? 💁🏻♂️
I should point out that Tether has been under some of the most intense scrutiny over the past 2 years. After more than 2 years investigating Tether, the NYAG decided to settle with them. Then, in March of this year you had that official attestation of the reserves of Tether that was issued by Moore Cayman. These are the local subsidiaries of Moore Global - a top 20 auditing firm. Some people may have taken issue with this as they said that it was not a full audit. But then again, none of the other stablecoin issuers had done this.
🤔 Market Manipulation? 🤔
There are two academic papers that have tried to study the impact of these prints on the crypto market. The first is this study by Richard Lyons and Ganesh Viswanath. It takes a look at the price impact on cryptocurrency immediately post the issuance of a large amount of stablecoins. They used statistical analysis and they found that there was no systematic evidence that stable coin issuance affects cryptocurrency prices. Another paper also found inconsistent results which showed that markets moved just before the print and that the size of the print had no impact on the prices itself.
📜 Disclaimer 📜
The information contained herein is for informational purposes only. Nothing herein shall be construed to be financial legal or tax advice. The content of this video is solely the opinions of the speaker who is not a licensed financial advisor or registered investment advisor. Trading Forex, cryptocurrencies and CFDs poses considerable risk of loss. The speaker does not guarantee any particular outcome.