Stable coins are designed to mitigate the risks associated with the volatility of bitcoin and other popular cryptocurrencies, however, despite their attractiveness, they are not only not a successful investment tool, they can also become a trap for investors. This opinion was expressed in his column in Project Syndicate by Barry Eichengreen, professor of economics from the University of Berkeley.
Stable coins are cryptocurrencies provided with other currencies (for example, the US dollar) or any other value, for example, gold. They are characterized by low volatility, the possibility of using anywhere in the world and the lack of communication with the central banks of any country.
Eichengreen divided stable coins into three categories and stressed that they are not suitable for investment because of the “shortcomings” unique to each category.
The first category is “fully secured” coins. The most stable, however, they are expensive and require a reserve equivalent or exceeding the market capitalization of stebblecoin. According to Eichengreen, such cryptocurrencies are too expensive for most organizations and are hardly suitable for government regulation.
The second category is “partially secured” coins. According to the professor, investors will find it too risky to finance their funds in a cryptocurrency, only half provided with a phiatic reserve. This can lead to collapse if the company wants to buy back the coin from investors.
The third and worst category is “unsecured” coins. They are not provided with a reserve, and the company hopes only for a balance of supply and demand to maintain the value of the coin.
A platform, which produces stable coins simultaneously launches tokens, which buys from investors during the fall in prices and issues new tokens during the increase. The platform attracts investors with a profit on deposit. However, this profit still needs to be received, so that in case of losses, both the platform and investors suffer.
Summarizing his findings, Barry Eichengreen writes that all this is well known to those who at least know the hard work of speculative attacks on tied exchange rates or had the opportunity to sit over a cup of coffee with a banker specializing in emerging markets. However, this does not mean that all these drawbacks of stable coins are also known to many inexperienced investors.