Stablecoins – what they mean for the future of money – Insurance

Most people have heard of cryptocurrencies, particularly the most well-known one – bitcoin. Its inexorable rise and subsequent roller-coaster volatility has made millionaires of some, but left many investors nursing often heavy losses, especially in recent months.

The original idea for bitcoin was laid out by Satoshi Nakamoto – presumed to be a pseudonym for a person or a group of people – in a white paper in 2008. In it, bitcoin was described as “a purely peer‐to‐peer version of electronic cash [which] would allow online payments to be sent directly from one party to another without going through a financial institution”.

The original idea behind bitcoin works, up to a point. Where it fails is as a form of payment or reserve currency, because it is not stable. In fact it is highly volatile. In the financial world, volatility represents how an asset’s price swings around its average. Equities, for instance, have a volatility of 21% (measured by the S&P 500), while US investment grade bonds are 5%.  Bitcoin currently has a volatility of 85.15%.

The original narrative was that as bitcoin matures its volatility would decrease. But this hasn’t happened.

What are stablecoins?

Stablecoins were meant to provide a solution to the problem of volatility. Their aim is to mimic traditional currencies, but with the added benefits of blockchain technology.

Blockchain is essentially a digital ledger of transactions, bringing benefits such as transparency, security, immutability, digital wallets, fast transactions, low fees, programmability and privacy, without losing the guarantees of trust and stability that come with using traditional currency.

Of course, digital money has existed for decades within the banking system, in the form of reserves. What makes stablecoins different is that they can be held by individuals rather thank a bank. It is digital pocket change held in your digital wallet, rather than a bank account.

While many see bitcoin as digital gold, stablecoins and digital…

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