Berkeley Professor Claims Stablecoins Not a Solution to Bitcoin’s Volatility

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Berkeley Professor Claims Stablecoins Not a Solution to Bitcoin's Volatility

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Stablecoins aren’t the panacea to Bitcoin’s fluctuating fortunes, according to a Berkeley professor, claiming that they have clear weaknesses.

Professor of Economics at UC Berkeley, Barry Eichengreen, suggests that stablecoins, seen by some as highly attractive for investment due to their being pegged to the US Dollar, aren’t so stable as the name suggests. Nick Tomaino, founder of @1confirmation, calls stablecoins “the holy grail of cryptocurrency” because of their price stable characteristics.

The subject is topical, given the news yesterday, reported by Bitcoin News, that two firms, Gemini Trust Company, and the Paxos Trust Company, became the first stablecoin providers to receive the go-ahead to list on exchanges in New York State. Gemini, one of the beneficiaries of the NY regulators decision, was boosted by the news, according to the Winklevoss founders, who see stablecoins as a “first step… making it safe and easy to buy, sell, and store cryptocurrencies”.

Eichengreen disagrees. He says that stablecoins fall into three discrete groups and each category has certain “weaknesses”, and are not only expensive but require a reserve that is equal to or more than the coins in circulation to ensure market stability, making government regulation complex.

He classifies “partially collateralized” coins into his first group, where only 50% of the circulating coins are backed by a dollar reserve, as risky, suggesting that they invite a “collapse of the peg” if the investing company wishes to retain the value of the stablecoins by buying them back from investors with the limited reserve.

According to the Berkeley professor, “uncollateralized” stablecoins are the worst-case scenario for investors, with no supporting collateral and are dependent on the laws of supply and demand in order to retain their value. This, according to the professor, should be avoided by investors, appearing to suggest that the name is a complete misnomer.

Myles Snider of Multicoin Capital is firmly in the panacea camp when it comes to Stablecoins, seeing them offering solutions to cryptocurrency volatility, claiming that such instability will prevent progress in terms of digital currency eventually displacing fiat currencies. He comments:

“The decoupling of governments and money could provide an end to hyperinflationary policies, economic controls, and other damaging policies that result from government mismanagement of national economies… and stablecoins can provide the solution.”

 

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