The Relationship Between Stablecoins and Bitcoin

The concept of Bitcoin is an incredibly simple one, and one that is very hard to argue with from a theological, political, or usability standpoint. The argument goes as follows: As the world becomes increasingly more divided geographically and politically, different governments are incentivized to manipulate and restrict access to their currency based on geopolitical chess matches. This is in contrast to much of the individual trends globally as we saw peaks across travel, international business, and globalization prior to Covid-19. Since all of these categories have increased in user demand, it would (in theory) make sense to have a global currency, no? In addition, the pain point of a government manipulating its currency is ultimately felt on the lowest rung of the ladder, individuals who often have no direct access to fiscal institutions who have the customer in mind.

This led to an opportunity for a digital currency like bitcoin. For simplicity, let’s shift our focus away from blockchain and stablecoins for a minute and solely focus on the practical usability, and the global demand for bitcoin. As most of you are probably aware by now, bitcoin exploded around January 2017 to an all-time peak of over $19,000 and woke up the slumbering bears who lined their pockets with traditional banks regulated by governments. The idea behind bitcoin is beautifully simple. Through a digital ledger on the blockchain where the data is decentralized, users can mine digital coins called “bitcoins” and use them as real currency to trade with merchants all around the world. All of a sudden, a poor farmer caught in civil war can put whatever money they have in bitcoin and protect themselves against a failing institution and fiat currency. This may be an extreme case of bitcoin usage, but the concept is for one single digital currency to be used for anything from filling up gas while on a road trip, to paying for the pizza you just ordered at 2am.

A quick detour is required at this point to highlight the basics of the economics of demand and supply. The more a good is in demand, the higher the price will be — especially if the good is scarce and hard to acquire. The question with bitcoin isn’t whether demand will increase price, but rather whether or not it will be accessible enough for people to use it. Without usability and access, a sheer spike in demand isn’t going to be sustainable. This is exactly what we saw in early 2017 as demand skyrocketed the price of bitcoin, but people couldn’t gain access to it in a simple manner, nor could they spend it on real use cases. Hence, the following drop in the price of bitcoin.

This is where stablecoins come into the picture.

In addition to access, stablecoins offer utility that bitcoin and other altcoins do not. Bitcoin has already done most of the heavy lifting in our basic economic theory. It has created a high demand, is hard to acquire through mining, and is scarce since only a fixed amount exists. Stablecoins fill in the last piece of the puzzle, they provide utility and access.

The applications of a universal, digital currency can be astronomical, as organizations and even governments are slowly starting to realize that. Not only has a global company like Facebook ventured into the idea of minting their own digital currency, but countries like the United States and even China as well. In many ways it is much simpler for a governing body to create a stablecoin pegged to its economy than it is to print real fiat bills and manage the cash flow thereafter. Underground criminal activity, or any form of monetary transaction would be digitally recorded if countries operated on stablecoins rather than cash. This presents an incredible opportunity for any nation to leverage its stablecoin as a global currency, providing security and transparency to those who adopt it while guaranteeing stability. While the world is focused on destruction via world war three, or a massive pandemic outbreak, an alternative reality could be a different type of cold war dominated by a true global digital currency — a stablecoin minted and pegged against a dominant nation’s global position.

In its simplest form, you can think of stablecoins as a gateway drug. They give people who want to experiment with bitcoins or altcoins a less steep and slippery slope to trudge down. Due to the volatility, decentralization and risks involved with bitcoins, most traditional financial institutions simply will not let you trade your local fiat currency with cryptocurrencies at their branch. Unfortunately, you can’t walk in and ask the teller to exchange your USD to BTC like you could with EUR or GBP. But stablecoins are (usually) pegged to real assets, and offer the stability that many banks, exchanges or other institutions need to manage their risk portfolio, while giving you the opportunity to play with cryptocurrencies until your heart’s desire.

In many ways, cryptocurrency in general is starting to lean on stablecoins to a point where it’s becoming a symbiotic relationship — both provide the other a key reason for existence. Without the volatility and excitement of something like bitcoin, we wouldn’t have the demand for a stablecoin to grant us access to it. But yet, without stablecoins, we wouldn’t be able to properly leverage traditional finance institutions to grant us access to them through loans or other methods of monetary transactions.

It is important at this point to take a side note that innovation, specifically complicated technological innovation that is not physically real — i.e., not something people can hold in their hands — has a slow and arduous adoption rate. People don’t like change, especially sudden change. But with bitcoin soaring to $19,000, the blockchain industry was given a once in a lifetime injection of speed in this adoption of innovation. This injection of speed has not been properly capitalized on by the industry, but stablecoins may be able to change that. The imagination of the public is already captured, stablecoins can not just lower the risks involved to invite more players into the game, but also act as an access point through more trusted financial institutions for the average person. Look at the sports betting world, and how that is slowly changing through a similar format as more and more governments and institutions are opening up to legal gambling because the imagination of the public was captured, and mobile betting and 3rd party exchanges are providing access. It is an exciting time to be in the stablecoin space, that is for sure.