An unstable Stablecoin might be an oxymoron. But still, the term “stablecoin” is deceptive, because they are not always as stable as many investors think.

Dezentrale Kryptowährungen wie Bitcoin weisen überdurchnittlich hohe Volatilität auf, weshalb sie sie kaum als Zahlungsmittel verwendet werden. Um

Decentralized cryptocurrencies like Bitcoin show above-average volatility – that’s why hardly anybody uses them as a means of payment. Stablecoins aim at solving this problem: They are digital currencies whose values are pegged to the price of a stable asset. 

In principle, a Stablecoin is the same as the US dollar of the early 20th century, only in a digital form. At that time, the gold standard was intact, whereby every dollar was pegged to a fixed amount of gold to ensure the currency’s stability.

Stablecoins follow the same principle: They are pegged to a more stable asset like a precious metal, a fiat currency such as the US dollar or the euro, or real estate, to avoid high volatility as it is the case with Bitcoin.The most prominent stablecoin today is Tether (USDT), a cryptocurrency linked to the US dollar.

Stablecoins are only as stable as their underlying asset

But how stable are these Stablecoins? First of all, they are only as stable as their underlying asset – and both currencies and precious metals can fluctuate in value, real estate even more so. 

Additionally, the values of stablecoins frequently deviate from their underlying assets, mostly due to changing trading volumes. 

To show the deviations from the underlying asset, the research firm Santiment looked at the standard deviations of various dollar-based stablecoins from their expected value – in this case, the expected value is 1 US dollar. 

Source: Santiment, Inc.

The data show that Tether remained relatively stable during 2018. BitUSD, on the other hand, had a much higher standard deviation of 2.5%. The bottom-line: Stablecoins are actually not that stable either.

However, they are much more stable than decentralized cryptocurrencies. In the case of Bitcoin, for example, changes in price of more than 20% within a single trading day have happened. 

16 out of 24 failed Stablecoins were pegged to gold

The above analysis refers to dollar-pegged stablecoins – with the US-dollar being a relatively stable underlying asset. However, the situation is somewhat different with gold-pegged stablecoins. On the one hand, gold itself is a more volatile asset that is also subject to significant fluctuations in value. On the other hand, gold stablecoins are complicated by additional challenges, such as gold custody. 

Besides, the argument that gold is a more stable asset than fiat currencies because it is not subject to monetary policy is not necessarily correct. Many nations sit on enormous gold reserves and nobody knows how they might use them in the event of a major economic crisis. 

Looking at the track record of gold-based stablecoins, it’s far from impressive: Out of 24 failed stablecoins, 16 were pegged to gold.

Stablecoin-investors also have to do their homework 

Volatility is only one concern stablecoin investors need to be aware of. The other issue is governance. 

Stablecoins require management by a central entity. Unlike their decentralized counterparts, someone has to manage the reserve of the underlying asset. Thus, investors rely on the management practices of a private company. 

This has led to problems in the past: Tether, for instance, got into trouble in mid-2018 when the issuing company could not prove that US dollars actually covered the entire tether circulation. As a result, the price of the currency temporarily retreated to $0.86. 

Nevertheless, stablecoins are far better suited as a means of payment compared to decentralized currencies. But all that glitters is not gold, investors must do their research. The key investment questions are: How stable is the underlying asset and how reliable is the issuing entity?