How Rising Stablecoins Use Can Impact Bitcoin, Ethereum

Bitcoin’s volatility is “a feature and not a bug” that could make stablecoins’ use rise in the long term, a new report by all-in-one crypto company, Blockchain, posited. The projected rise would impact top cryptocurrencies like Bitcoin and Ethereum in some ways, it suggests.

Known for their value stability when compared to national currencies, the report notes that stablecoins have stepped up to fill the gap created by Bitcoin’s volatile nature. The feature, it adds, has been the main factor preventing cryptocurrencies from being an alternative means of payment and a unit of account in the broader economy.

Rising stablecoin use
Hence, so long Bitcoin remains more volatile than fiats and physical commodities like gold, stablecoins use and their listings on cryptoasset exchanges will continue to rise.

“We expect the range of options for gaining direct investment exposure to growing stablecoin use will increase as more algorithmic and cryptoasset-backed stablecoin systems go live in the coming months,” the report says. It adds that stablecoins will also become more complementary than competitive with bitcoin-like cryptocurrencies.

Stablecoins are already an important part of the digital assets ecosystem. Tether (USDT), for example, rose from 57% in 2018 being the second most actively traded cryptocurrency at ~75% of Bitcoin daily volume by 2019.

Also, companies like Facebook, Telegram and Signal have expressed plans to start issuing stablecoins to support their businesses. This week, reports emerged that Facebook which wants to use a stablecoin to power its Whatsapp messaging platform will launch the coin by mid-2019.

Even despite design uncertainty and regional factors like local regulations, the paper’s authors still believe that there is space for at least eight new stablecoins in the short- to medium-term.

Good and bad
In the long term, stablecoins are expected to generate immense value for the digital assets ecosystem and help create broader adoption by successfully addressing volatility especially among indecisive institutions and individuals.

When that happens, the rising use of stablecoins may weigh on the prices for some cryptocurrencies like Bitcoin, competing with its certain medium of exchange and store of value use cases. Stablecoins could compete more directly with top cryptocurrencies on its current use cases like payments.

50% of the existing 54 stablecoins currently run on Ethereum. The growing use of Ethereum-based stablecoins should increase demand and use of Ether for making them function. However, the report notes that there has been a material decline in the percentage of stablecoin projects running exclusively on Ethereum in the last five months.

“This decline is likely driven in part by concerns over Ethereum’s relatively high transaction fees and scalability concerns (limited capacity),” it states. “Other competing ‘Ethereum killer’ smart contract platforms have also attracted significant funding and are deploying some of this capital to attract leading applications to build on their platform. While the barriers to transitioning a stablecoin from a technology platform like Ethereum to a competing smartcontract platform are not insignificant, they are by no means insurmountable.”

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