Stablecoins

Cryptocurrencies such as Bitcoin (BTC) were originally intended to serve as money. Historically, different objects have served as money: fiat money issued by governments, gold, cigarettes during wars or in prisons and even shells shaped into beads.

What is Money?

Consequently, economists define money not in terms of what it is, but rather in terms of what it does. In other words, economists focus on the functions that any object that is a candidate for money needs to perform.

Money essentially performs three functions:

1. It serves as a medium of exchange
2. It is a store of value
3. It is a unit of account

For money to effectively perform these functions, its value (measured, say, in terms of the goods and services it buys) must be relatively stable. For example, if you were offered money in a transaction today and you were sure that the amount of goods and services it can purchase will fall by 10% in a day, you may be disinclined to accept that offer and look for a medium of exchange that better retains value. Similarly, if you were to save money and its value is volatile, it can become unattractive as a store of value because when you need your savings it may be worth less than what you put in.

One of the characteristics of government issued (fiat) money is that, except during periods of extremely high inflation, its value in terms of the goods and services that can purchased with it is relatively stable. Over time, fiat money loses value at a somewhat predictable rate that is governed by inflation in the prices of goods and services.

Cryptocurrency Volatility

Unfortunately, BTC and many other cryptocurrencies are extremely volatile at this stage. This uncertainty is a disincentive to utilise these cryptocurrencies if you need a medium of exchange or as a store of value. To a large extent, the high volatility in BTC and other cryptocurrency prices indicates that they are more likely to be used as a speculative asset, rather than as money.

Stablecoins

Stablecoins are an asset class that help resolve this issue of high volatility for cryptocurrencies. In this video, we explore the nature of volatility in cryptocurrency markets and what stablecoins add to the cryptocurrency ecosystem.