Reserve Stablecoin Claims Other Digital Fiat-Pegged Tokens Manipulate Market Capitalizations

Stablecoins promise cryptocurrency investors stability in a volatile digital asset market. However, there are several stablecoins that allow users to select which is their convenient option. Although it seems that these stablecoins help the crypto market, there are some experts that believe that they are vulnerable to the same manipulative practices that affect the whole cryptocurrency market.

Reserve Claims Stablecoins Inflate Market Capitalizations

There are different stablecoins in the market. Perhaps, the most popular of these stablecoins is Tether (USDT). This digital asset has been operating in the market for over a year, but it does not mean that it has not been involved in controversies. Indeed, Tether has been accused of being used to manipulate Bitcoin’s price during bear markets. This allowed the most popular virtual currency to fall even further.

Nevin Freeman, the chief executive officer (CEO) of Reserve, said that several rivals inflate their market capitalizations artificially creating misleading data on cryptocurrency-tracking sites such as CoinMarketCap, among others.

Freeman realized that there are two tactics that stablecoins use in order to improve their metrics. One of them is giving discounts to investors that agree to lock up their funds for a predetermined tie frame. Another tactic used is to encourage wash trading for users to buy and sell the same virtual currency and inflate volumes and liquidity.

There are two examples of discounting tactics that have been performed by Paxos (PAX) and Gemini USD (GUSD). Both of them offered 1% discounts to over-the-counter (OTC) purchases in order to help adoption grow. Users had to lock their stablecoins for a predetermined lock-up period. According to Reserve, this is the reason why PAX and GUSD surged back in December 2018. In December, GUSD market capitalization increased $87 million.

Meanwhile, Paxos experienced a good moment with the launch of HUSD, a pool of stablecoins that is currently offered by the crypto exchange Huobi. Users could exchange their stablecoins without trading them. In this way, traders were arbitraging these coins and mass-withdraw PAX. PAX’s market capitalization doubled in a single day from $40 million to $80 million.

Tether has also been accused of wash trading, something that is strictly prohibited and regulated in traditional markets. They distort the real supply and demand. Tether still has the highest market capitalization in the market with over $2 billion. This is why Freeman believes that market capitalization and trading volumes are becoming bad metrics.

As reported by CCN, Freeman says that Goodhart’s Law applies to this case.

“When a measure becomes a target, it ceases to be a good measure,”

says the idea proposed by the British economist Charles Goodhart.

Trading volume and market capitalization became targets to those participating in the cryptocurrency market, and this is something that can be applied not only to stablecoins but also to virtual currencies.

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