Did you Know More Than 65% of Crashed Stablecoins Were Gold-Backed?
The cryptocurrency sector has recorded a lot of growth in recent times, especially with all the good news that has come out of the industry in 2019.
The fact that the crypto winter successfully ended and the market has been quite impressive since April when the surge started, coupled with Bitcoin’s over 200% return this year alone, has brought many people to the sector.
There is also a lot more institutional investment than has been seen in previous years. Regardless of all these, there are still a lot of people – some of them powerful government officials – who are less than excited about cryptocurrency.
On one hand, people are bothered about the decentralization and the fact that everything goes largely untraced. However, on the other hand, the biggest problem people have (including crypto proponents) is the volatility.
Bitcoin, for example, recently gained more than $1,000 in a short period of 24 hours and another 24 hours after that, it lost more than $2,000, currently trading just a little below $11,000.
A stablecoin is a digital asset whose value is backed by a particular asset or a range of assets. They are specifically designed to control the usual cryptocurrency instability as much as possible. A stablecoin can either be pegged to a traded asset like gold, or to a particular fiat currency.
However, it seems like the general idea of stablecoins (especially those backed by gold) isn’t really working and a lot of them are either defunct or didn’t kick off at all in the first place.
According to information from Blockdata, a blockchain analysis service, almost 120 stablecoins have been announced since January 2017 and till date, they have all failed to kick off. Another 24 stablecoins did kick-off but didn’t do well and eventually died out leaving only 66 stablecoins active today.
Another interesting piece of information is that of the 24 stablecoins that crashed out, 16 – representing more than 65% – were not backed to fiats but to gold reserves.
It has been said that stablecoins pegged to fiat should generally be supported by a properly centralised financial figure like a bank, so as to ensure some security. While this sounds like a fantastic idea, the recent problem that Bitfinex and Tether had, has shown that there is always the chance that things don’t go as well as planned.
Gold-Backed Stablecoins Might Be A Bad Idea
The assumption can now also be made that gold reserves are not the best backing for a stablecoin. For a gold-backed coin to work, there has to be actual gold stowed somewhere for the exact purpose of backing the coin.
However, a gold backed stablecoin would still have the same volatility issues plaguing the rest of the sector. This is because gold is far from stable and is still vulnerable to price swings.
Gold has been advertised for hundreds of years as a great store of value and while this works sometimes, one has to wonder why this many gold-backed stablecoins have crashed. There’s also the fact that some of the other cryptocurrencies give better returns than any stablecoin. Ethereum for example recently recorded a 150% year-to-date return while that of Bitcoin is well past 200%.