The Otherside of Stability: Unstable, Stable, and Pegged Coins
Tags: Economics, Trading, Crypto Trading, Finance, Bitcoin

A Visual for Unstable, Stable, and Pegged Coins

The Otherside of Stability: Unstable, Stable, and Pegged Coins

“2018 is the year of the stable coin,” says Tamar Drachli from COTI (Coins of the Internet). The concept “stable coin” is thrown around a lot. However it is not well defined. I am proposing a slightly different categorisation that I think will make more intuitive sense and help organise our understanding of cryptocurrency. This in turn will help make these concepts more usable. Thereby improving how we work with these concepts and cryptocurrency in general. In addition it will help cryptocurrency companies decide what they want and the lay man to make sense of what is going on in the cryptoworld. Disclaimer I am not giving any financial advice or endorsing any product(s) mentioned, or not, or implied or linked through hyperlink.

I am going to therefore define what is usually camped as 2 categories into 3 distinguishable groups. Instead of grouping cryptocurrency into unstable and stable, which includes pegged coins, I will split the latter group into 2. In other words I am proposing that there should be 3 categories, unstable, stable, and pegged coins. The term coins will be used to refer to all cryptocurrencies to simplify this discussion.

Unstable Coins

Unstable Coins Visually Represented

These coins are like the aftermath of a war, or battle in ancient times. Many causalities and loads of action with few winners. Their trading graphs resemble roller coasters more than anything else or perhaps the ups and downs of hormonal changes in a child becoming a teenager oscillating between excelling and throwing tantrums, at a whim.

Most people, both those in the cryptoworld and the general public, are probably most familiar with the unstable coin. An unstable coin refers to a coin that is volatile in value. The volatility can range from extreme to mild, but still unpredictable enough to not know what will happen next. That is, an unstable coin is all about speculation or anyone’s guess. Drastic changes in value occurs over short periods of time, even minor changes, but frequent would fit this definition too. When most people started entering the market of cryptocurrency, this was the case. 2017 was probably the most volatile period for all coins. However in 2018 things have started to settle down for most of the volatile, or what are known as, unstable coins.

It is fairly obvious that this should be happening because at the beginning of 2017 more and more people started to find out about Bitcoin. Bitcoin was starting to make headlines in newspapers and slowly was becoming an everyday concept. ICO were popping up all over the place and everyone who could was joining the space race and gold rush. Space race referring to developing the cryptocurrency that would solve the problems Bitcoin faces, scaling, security, and fee issues. Gold rush can be taken as either those who were looking to make a quick buck off cryptocurrency by trading and taking advantage of ICO explosions and those who were creating ICOs as a way to create fools gold in order to make a quick buck off the ICO explosion. By the end of 2017 most people had wised up and ICOs were no longer the hot, new fad causing FUD (fear, uncertainty, and doubt) or maybe more importantly FOMO (fear of missing out). The wild swings in the cryptomarket had calmed down more. The wild west was calming down, even though we still see instability and lots of speculation in cryptocurrencies in 2018.

Pegged Coins

Pegged Coins Visually Represented

Stable coins usually refer to coins that are pegged to something that has intrinsic or backed, value. In other words a pegged coin has an value that is stable over time, for example gold, diamonds, and fiat currency, which is itself supposed to be pegged to, or backed by, gold. However I am going to categorise these as pegged coins and focus on stable coins as a category of its own below.

A child of extremely wealthy parents would be a good way to think of a pegged coin because the child’s wealth is tied directly to the wealth of his or her parents. If the child writes out an IOU note, and it is known the parents will honour the note, then the note is considered as good as the parent’s cash. The note is backed by or pegged to the parent’s money. This is how the US (United States) Dollar worked with gold. Fort Knox held all the gold and the paper US Dollar represented that gold. So you could rely on the paper as a form of payment in gold. As with the metaphor though, the dollar is only as good as the gold it represents and is dependent upon 2 factors. First the gold holding its value. Gold price does fluctuate, but not by much and usually not over a very short time span, such as minutes, hours, or days and usually bounces back or recovers quickly after a drop or rise. Second that the dollar that represents the gold is not over printed, which is where we find ourselves today.

Unstable coins were the impetus of many pegged coin ICO projects. Tether is an excellent example of this. 1 Tether is always worth 2 US Dollar. This is because Tether is pegged to the US Dollar. It was one of the first pegged coins. Like most firsts, it was met with fascination and speculation and lots of criticism because it was different. Interestingly E-Gold actually predated all pegged cryptocurrencies. E-Gold dates back to 1995. Goldscape.net/gold-blog/gold-backed-cryptocurrency lists a number of projects that are pegged to gold. There is also a cryptocurrencies that are pegged to diamonds, called carats.

Stable Coins

Stable Coins Visually Represented

So what is a stable coin? Good question. I am arguing that an unstable coin is a coin where value varies in such a short time span that it gives the trader whiplash just watching the price changes and pegged coins are actually only stable because they are backed by a commodity, asset, or fiat currency that is stable. So what is a stable cryptocurrency coin. Just that, a stable coin similar to the fiat US Dollar now, which should be and technically is linked to gold, but actually is not.

The value of a stable coin is much like the stability of the US dollar today. It is stable in and of itself. Basically the market and other tools are used to keep the price of a stable coin stable. This can be thought of like gold and the US Dollar in a way. Gold and the dollar are stable, but can and do fluctuate. However they usually only fluctuate “insignificantly” in terms of a payment method and recover quickly, even if the fluctuations are large. This is of course in theory.

The advantage and disadvantage of a stable cryptocurrency coin is that there is no intrinsic value. On the one hand this gives it the ability to maintain stability no matter what. On the other hand, though, there is nothing backing the stability so it could potentially have a value of zero, bottom out, and or disappear completely. While the latter is highly unlikely, it is possible. The more people who invest in the stable coin the less likely it is to disappear because it is in use and there is incentive to retain its value. This makes the stable coin more risky than a pegged coin, which is why I think it is beneficial to divide this category into 2 separate categories, namely, pegged and stable coins.

My opinion is that COTI (Coins of the Internet) will be the first stable coin. Right now COTI has a COTI-Dime, which a pegged coin. The COTI-Dime is pegged to the US Dollar and is always worth $0.1 US Dollars. However when their main net is launched, which is coming soon, they will launch COTI Pay, which will be (possibly) the first stable coin as I have defined stable coin in this article.

Conclusion

It seems intuitive to me that there are 3, as opposed to 2, categories of cryptocurrencies, namely unstable, pegged, and stable coins. Unstable coins are thrill seekers’ and high risk investors’ dreams come true. Unstable coins might also be the source of get rich quick schemes and what has become known as “pump and dump” schemes. Pegged coins might be the closest cryptocurrency comes to economics as we know it. Stable coins might be the realisation of the dream of Bitcoin’s, and Nakamoto’s dream, a complete upheaval and replacement the current economic system. These are very bold statements and they are meant to be. They are also meant to sensationalise the concepts. Therefore do your own research. This article does not offer financial advice or endorse any products mentioned, or implied, or not mentioned for that matter. The purpose of this article is exclusively to help improve the categorisation of cryptocurrency tokens or coins.