Quora Answer: What Do You Think about Investing in Stablecoins?

The following is my answer to a Quora question: “What do you think about investing in stablecoins?”

I think very poorly of them.  In theory, stablecoins are cryptocurrencies that are pegged to a currency, most often the US Dollar, or the Swiss Franc, or pegged to an exchange traded commodity, mostly gold.  This peg is supposed to make stablecoins less volatile, and more attractive to mainstream finance.  Since it is pegged to a known currency or commodity, it is supposed to facilitate a secondary market by making them liquid by being more easily exchangeable.

Here is the main problem: how do we trust this peg, when the backing reserves cannot be independently audited?  Also, there is still some underlying volatility inherent with currencies and commodities.  This is more so for commodities.  When the market undergoes upheaval, how will they maintain the peg?  To date, I am very sceptical that any “stablecoin” has lived up to the criteria of actually being stable.

Another point of consideration is regulatory concerns, which means this peg is either impossible to maintain, or lacks credibility.  For example, Basis, the most high profile and well-funded stablecoin, shut down in December 2018.  Their official reason was an unfavourable regulatory landscape.  We could argue that the regulatory landscape is unfavourable because they cannot convince anyone that they have the financial strength to maintain a viable peg over an extended period of time.  They raised US$130 million in funding.  That is not enough to do what they want to do.