Most of the trades in cryptocurrencies are powered by speculative expectations of profit rather than the transactional use of crypto as an alternative to fiat currencies.
This piece explores the growing interest in stablecoins and how stablecoins could potentially spur an increase in the use of cryptocurrencies as a means of transaction, settling of trades, and the exchange of value.
Granted, the Crypto Radar study is Bitcoin-specific, but the fact that Bitcoin has a market dominance of 67.7% among cryptocurrencies suggests that what’s true for Bitcoin is most likely true for all other coins.
Below are some of the reasons the transactional and mass-market adoption of crypto haven’t taken off.
Hybrix offers an easy to use, open source, 2nd layer solution to implement true interoperability
● Lack of interoperability in coins and chains
● Inherent volatility in the price of crypto
The second challenge delaying the transactional use of cryptocurrencies is the wild volatility. The price of crypto tends to swing wildly in response to market news, whale trading, and overall sentiment. For a commodity to be regarded as money, it needs to retain its value over long periods, but a 10% to 20% swing in price during a trading session is considered normal in the cryptocurrency market. The worst part is that the jury is still out on whether Bitcoin and other cryptocurrencies are correlated with stocks and other traditional assets.
The chart above plots how Bitcoin and other traditional assets have fared since the WHO declared COVID-19 a public health emergency on January 30. From January until May 14, The NASDAQ Composite lost 19.44%, the Dow Jones Industrial Average lost 14.22%, and the S&P 500 lost 4.69%. Conversely, Bitcoin was practically flat with a 0.43% decline. Now, to the point of volatility, the cryptocurrency suffered a massive 42% price drop between March 12 and March 13 as seen in the annotated part of the chart.
● The learning curve for atomic swaps
However, Atomic swaps require a level of technical maturity that the average crypto trader or investor doesn’t possess in the use of Hash Timelock Contracts (HTLC). For people that aren’t technically savvy, swapping a coin for another is too much trouble, and they’ll rather keep their crypto activities to a few legacy coins that they understand.
Hence, it is not surprising that the average crypto trader/investor only has a handful of these coins in their portfolio despite the fact that there are more than 4000 coins in the market.
Potential solutions to that could drive the transactional use of crypto
While popular cryptocurrencies such as Bitcoin are too volatile to be a reliable source of value or means of exchange, stablecoins provide a better compromise to enjoy the decentralized properties of crypto without the inherent volatility.
However, stablecoins are not without issues – the most popular ones are privately issued and their legitimacy is still being contested. Also, there’s a lack of interoperability between many cryptocurrencies and stablecoins. In addition, it would be impractical to have a stable for each of all the coins and altcoins in the market. Below are two developments that could drive the transactional use of stablecoins.
● Hybrix to deliver cross-chain interoperability
Hybrix is designed to leverage the underlying data layer of the blockchain to enable these cross transactions; the blockchains do not need to implement a hard-fork, and there’s no need to wait for everyone to implement atomic-swap on their ledgers.
More interesting is the fact that stablecoin transactions are surging on the Ethereum blockchain as Tether to Ethereum transactions has jumped more than 75% in the year-to-date period to cross the $4B mark. The surge in transactions is already causing some issues on the Ethereum blockchain, Ethereum 2.0 is still far from becoming a reality, and solutions such as the Hybrix protocol could serve as a bridge to take some of the overloads to Ethereum.
Such a bridge will make it easier for people to conduct cross-chain transactions, reduce the resource load on bloated chains, and facilitate easier cross-platform transactions between ERC-20 tokens and other networks.
● Stablecoins powered by legacy institutions
An increase in payment gateways and merchant adoption could also drive the transactional use of cryptocurrencies by making it easier for merchants to accept crypto payments. However, given the inherently volatile nature of cryptocurrencies, the most likely scenario is skewed towards stablecoins if transactions are settled in real-time and with low fees.
At a more crucial level, the world will adjust to a new normal after COVID-19, and it would be interesting to see how the cryptocurrency market evolves over the next few years as the global economy goes through a post-COVID-19 recovery.