Once again Tether, the stable coin is in the focus these days. The reason mainly is because it is losing value. Now how is this possible? Tether should be the stable coin, the safe place. I’m not the expert on the topic, but I’m in the crypto market for year and a half, and from personal experience I can say, having some form of stability is important. We have seen as well that, new stable coins been created these days.
How are Tethers, stable coins created?
Unlike most of the cryptocurrency, which have some form of algorithm and mathematics that tells how many coins will be created, Tether is not like this. Since it is baked with US dollars, this means that for one Tether to be created, a dollar needs to be put in the bank. Meaning that the supply of Tether, or any other stable coins is defined by the possibility of the company to have a pile cash sitting in the bank. It also means that this companies are in total control of creating and burning these coins. Put a dollar in the bank, a coin minted, remove a dollar from the bank, a coin is burned. Having the total power of supply of a coin can be powerful tool.
How is the stability of Tethers, stable coins maintained?
The purpose of this coins is to be stable. But markets go up and down, how it is possible for this coin to remain stable? It is not natural. The easy way to do this is having a big reserve of dollars. Not just Tether, but dollars.
When there is a bull market most of the people tend to by the other coins, not the stable ones. In these situations, there is more supply then demand, and if there is to much selling of the coin, the company need to buy its own coin, and hold them or burn them. To do this it need cash on the side.
We have seen recently the price of Tether fall, but not because of the bull market, but speculations. And it seems that the company did just that, they bought some of the coins, and a part of them they burn it, and a part of them they hold it.
Now in the bear market, most people will tend to by the stable coin. In this situation there is more demand then supply, and the price of the coin can go up. This means new coins need to be put in the market. To do this, the company again needs cash on the side in order to put more coins on the market baked in dollars.
So, no matter is it a bull or bear market the entity behind the stable coin needs big reserve of cash on the side. With crypto prices massive volatility one can ask himself is this possible. And from a business point of view, does it pay off to hold that cash, just standing there in case of need? It could be invested in something else and have ROI. I guess the way to go here is to have an arrangement with the bank, that will provide you cash if necessary. And probably that is how they do it.
What about regulation?
Since these coins are not regulated by the cryptography, math and algorithm, in my view they need strong regulation. Rules should be put in place with a strong guarantee of cash, or arrangement with banks for cash. There should also be some limits of how many tokens one can produce in relation with the cash arrangements. Regular reports and transparencies are also mandated.
Do we need Tether and stable coins at all?
I have asked myself this question, since there are already exchanges where crypto is traded with fiat. Why not just all exchanges have fiat to crypto option. But it seems that these coins are necessary. Crypto is a global phenomenon, and coins are exchanged on a global scale easily. Depositing fiat on exchanges can be tricky, and the flow of fiat worldwide is far more complicated then crypto. Sometimes there are legal barriers as well. Also, some people prefer crypto over fiat.
All the best
@dalz