Figure 5: Top exchange pairs on Binance by 24h volume
Opportunity for crypto traders with stablecoins as safe havens.
Using a conservative estimate, exchanges around the world process ~$5.4 billion daily. Further, according to the Satis Group, crypto trading volume is expected to grow by over 50% through 2019. This projects the global crypto trading volume to be over $8 billion through 2019. This growth in trading will fuel the demand for stablecoins. Stablecoin companies have the opportunity to capitalize on this growth and improve where existing safe haven assets fail. Traders who employ this strategy are looking for stability in their safe haven assets. We can understand why stability is important by looking at the example of Tether. If a trader used Tether during a period of downside volatility while it was priced at one of its highs ($1.08), the trader would be buying each unit of Tether at an 8% premium (Tethers real value is 1$). This would translate into a 7.4% overall loss of wealth once Tether’s price stabilized ($1 is 7.4% less than $1.08). In this scenario, a $10,000 trade out of bitcoin would ultimately be worth only $9,260. Because perfect stability has not yet been reached, there is still a need in the market for better stablecoins. For example, Binance recently announced their plan to include trading pairs denominated in a basket of stablecoins. By spreading trading volume across multiple stablecoins, there is less pressure on any one asset—ultimately reducing volatility. Consequently, this further reduces the volatility of the safe haven asset as well. Factors leading to success with stablecoins and exchanges.
Stablecoin companies listed on many exchanges (especially large ones) have a higher likelihood of success. This is because by being listed on many exchanges, they gain exposure to more traders, thereby capturing a larger market share and establishing a better network effect than stablecoin companies who are listed on a few small exchanges. Furthermore, being listed on many exchanges increases the likelihood of being included in a bundle of stablecoins (such as the Binance bundle). By being included in a bundle, the token is guaranteed higher volume (the number of trades that occur over a set period of time) which supports the liquidity of the token. Increased liquidity in an asset increases its price stability because when buy and sell orders at a given price are being settled quickly, the trader does not need to change their bid or ask price.
The use of a basket of stablecoins in a trading pair is meant to create an asset with more liquidity by spreading trading pressure across multiple tokens. By spreading pressure across multiple assets, exchanges reduce the risk of price volatility of the assets in the basket, thereby increasing the stability of the basket itself. That being said, if a stablecoin is even more stable than a basket of similar assets, that stablecoin would immediately become the preferred safe haven asset. Therefore, stability is an important factor with respect to being included in a stable basket and with respect to being a stand-alone safe haven asset.
3.2. Dollarization 2.0
Solving the problem of hyperinflation in developing countries.
In the year 2000, when the Ecuadorian Sucre had 96.1% inflation, the citizens of Ecuador turned to the USD to hedge against the inflation. The country began to unofficially accept the US dollar until the government decided to make a formal switch in the same year. With the adoption of the USD as the national currency, the financial markets stabilized. Citizens in countries whose currency has high inflation often turn towards more stable assets to protect their wealth and allow them to participate in commerce.
The process of a country using USD as a means to offset high inflation and local currency instability is known as dollarization. During dollarization, the population may or may not coordinate the adoption of a foreign currency with their local government. Despite governmental currency controls, populations may create black markets for physical USD. One such market can be found in Argentina, a country that had an inflation rate of greater than 45% in October 2018. Citizens of Argentina use USD in black markets as a currency hedge against the naira, their inflationary national currency. What if these assets were instead digitally native? Opportunities with stablecoins and Dollarization 2.0.
Dollarization gives countries suffering from hyperinflation a means to protect themselves against the rapid depreciation of their buying power. Cryptocurrencies extend this hedge and give citizens of these countries access to a safe haven asset. Furthermore, stablecoins can be introduced digitally, whereas USD must be imported by tourists. Developing nations are primed for stablecoin dollarization for multiple reasons.
Onboarding Infrastructure: Whereas traditional financial inclusion requires banking infrastructure, stablecoin systems only require digital wallets (which can be housed on mobile phones). In Africa, for example, the number of unique mobile phone subscribers is projected to be 634 million by 2025 (52% penetration rate). These mobile phones can host digital wallets and give access to exchanges which list stablecoins. This, in turn, will infuse stable capital in their local markets. (The global penetration for mobile users is approximately 64.5%).
Hedge against inflation: According to our analysis, 47.33% of Africa’s population is experiencing inflation of over 10% (inflation data from 2018, population data from 2017). If stablecoins are able to maintain price stability and appropriate ease of access, they could be attractive means to hedge against the volatility of local currencies. According to Kate Mitselmakher, CEO of Bloccelerate:
"Consider the Zimbabwe dollar, for instance, which has suffered a staggering inflation of 500,000,000,000%. Many Zimbabweans have already turned to Bitcoin as a hedge against their national currency, thereby driving the Bitcoin price up on the local crypto-market. Creating a new cryptocurrency presents a viable solution for the Zimbabwean government to alleviate the bleak perception of its country’s monetary challenges. " Ecosystem Support: An ecosystem which develops around stablecoins—such as entrepreneurs leveraging it as a their primary form of value exchange—is essential to stablecoin adoption. Emerging countries have an increasing opportunity to take advantage of this trend. For example, there are 6,000 startups in Africa, with over 150 having secured funding in 2017 (data from Crunchbase, Angel List, and Disrupt Africa). Therefore, this emerging market has incredible opportunity to adopt stablecoins for ease of doing business, low transaction fees, ease of access, and other reasons discussed above.
Factors leading to successful dollarization 2.0.
Some important factors which will drive success of dollarization in emerging regions are interface integration, appeal to businesses, user base trust, and compliance.
Enterprise Adoption: Enterprise adoption of stablecoins reduces the need for financial intermediation and improves the ‘stickiness’ of the stablecoin currency. The more heterogeneous the market of safe haven assets is, the harder it is for one particular stablecoin to gain traction. However, enterprise adoption of a particular stablecoin(e.g. as a payment mechanism), would greatly increase the adoption of such an asset.
Gaining User Trust: Gaining user trust is the key prerequisite of broader market adoption. Therefore, stablecoin companies must find ways to communicate the value of their token. The more users buy into the underlying value of the asset, the higher adoption this particular asset will likely incur. For example, before 1971 when the USD was backed by gold, people could exchange convertibility notes (dollars) into gold. This practice was fairly common while people were still new to transacting with notes (as opposed to precious metal coins). Eventually, however, note-to-gold conversion waned as citizens began trusting the notes could be converted anytime.
Overcoming Regulatory Uncertainties: Unfavorable regulation is likely the largest limiting factor for adoption. This is because an outlawed currency is unlikely to be accepted by enterprises and is unlikely to be listed on existing digital wallets. Many governments are opposed to dollarization for three reasons: Loss of seigniorage profits, reduced effectiveness in monetary policy, and loss of a sense of autonomy. By choosing regions with a favorable regulatory environment, stablecoin companies can mitigate the risks associated with negative regulation. Also, by working directly with governments to repay seigniorage losses or to rebrand as a government token would be effective ways to encourage positive regulation.
3.3. Use Case 3: P2P and P2B Payments.
Opportunities for stablecoin adoption in the P2P and P2B use case.
According to eMarketer, only 1% of millennials use mobile payment (digital wallet) services as their primary source of payments (see figure 6). Furthermore, mobile payments are projected to have a CAGR of 33.8% through 2023. Stablecoin solutions have the potential to capture some of this growth.