On the golf course, there is the long game and the short game. To score well, you need to excel at both. Similarities apply to traditional financial planning－where money allocated for short-term and long-term needs mandate instruments designed for different time horizons.
Think of the new wave of digital assets in today’s world the same way. By holding different cryptocurrencies optimized for short-term and long-term needs, one can improve his or her own chance of scoring well. With all the market volatility that led to the monumental rise and crash in Bitcoin’s value, a renewed movement towards stabilization became necessary. Now, two separate, yet complementary, types of coins have emerged as the next generation in the industry: stable and buoyant coins, both of which leverage forms of monetary policy to help stabilize their value. How did we get here, what are the purposes of each, and will they have staying power?
After the housing market crash and the big bank failures in the 2008 recession, cryptocurrency became the new curiosity in the public eye with Bitcoin’s dramatic rise in the mid-2010s to a price of nearly USD $20,000 per coin. However, the speculative bubble burst, stemming from problems with blockchain forking, speculation on SEC rulings, and initial coin offerings (ICOs) that saturated the market and/or seemed illegitimate. The February 2018 steep crash brought Bitcoin’s value down to around USD $3,000, a far cry from the $20,000 peak it had reached just months before in December 2017.
To combat this market volatility problem, the answer appeared to be straightforward: attach or “peg” the coin to a fiat currency reserve. That way, stability would be achieved through pegging to an underlying asset, which provided much-needed price stability by way of a monetary policy that hadn’t been applied before to cryptocurrencies. Coins that adopted this change, called stablecoins, however, were left with a limitation that the market volatility had initially allowed for. Because of this pegging mechanism, the coin value is deflationary and can’t materially increase or decrease in value since the underlying fiat currencies are relatively stable.
As a result, the stablecoin, is becoming a transactive financial instrument that is best used to purchase items in the same way we use fiat currency to buy what we want at the shopping mall or local grocer. So, for example, when someone might want to buy a loaf of bread with stablecoin, the price would not fluctuate so quickly within days, hours, or even minutes. Plus, there is the benefit of convenience and low transaction fees that come with decentralized digital assets. In a bank account analogy, one might think of stablecoin as the checking account. So, what’s the savings account that complements it?
What could coin holders do to stay “unbanked,” have a stable asset, reduce market volatility, and avoid inflationary effects over the long haul? In the absence of a digital asset for an optimized long-term store of value, the idea of “buoyant coin” was born.
A “buoyant coin,” similar to a buoy in the ocean, is able to rise in value as the water level (demand) increases and is able to propel its way back to the surface when tugged underneath (downside volatility mitigation). Such coins are designed to exhibit lower volatility than unstabilized coins such as Bitcoin by coding the blockchain they run on to react to real-time changes in supply and demand and apply the desired monetary policy techniques at any given time. One example would be activating a dynamic sellers fee during periods of market selling pressure, whereby the fee increases if the pressure further escalates to dissuade additional selling. Another example of buoyant monetary policy is the ability to “lock” for years and earn additional incentives, similar to a certificate of deposit (CD): the longer the duration, the higher the rate. With buoyant coins, purchasers are encouraged to hold for the long-term and discouraged from hasty actions that magnify instability.
It’s also implied that quick rises in value are improbable, so day trading for quick profits would not be well suited for buoyant coins. In returning to the bank account analogy, the buoyant coin serves as a savings account, designed to store value over extended time periods.
The two types of coins don’t necessarily contradict each other, though. Buoyant coins are, in many respects, the second generation of stablecoins. Together, the stable and buoyant coin complement each other rather well, serving different purposes for shorter- and longer-term goals－people will need both.
Will these new, improved digital assets fade away or will they become the survivors of the bubble burst that lead the way, similarly to eBay and Amazon’s post-Dotcom burst of success? It appears they will have staying power. In 2018, total investments in blockchain and cryptocurrency markets were $2.8 billion over more than 50 deals. And for the online consumer, the e-wallet, an important component of cryptocurrency trading, is slowly taking over. Vibes, a “customer loyalty platform for mobile wallets,” found, for 2019, that 28% of mobile phone users already have a mobile wallet, an increase of 22% from 2018. It’s unlikely to end there either, as the public seeks greater transparency from financial institutions and the world becomes more and more digitized.
Plenty has been learned since the early days of Bitcoin and the first generation of digital assets. The new wave of stable and buoyant coins apply different forms of monetary policy to tackle the problems faced by the first generation of unstabilized assets. Like any new idea or technology, it takes time before it’s perfected. While any newcomer on the block can fade overnight, these optimized crypto assets have the potential to replace the traditional instruments we use to purchase and save with every day. Short or long-term, the crypto revolution continues to march forward and will likely be par for the course in the not too distant future.
Ciarán Hynes is co-founder and Managing Partner at COSIMO Ventures, a deep technology firm specializing in Blockchain, and has over 10 years of deep tech market experience. He is a serial entrepreneur, investor and Board Director with companies including Gecko Governance, Locatible, Nova Leah and Oneiro, and has helped navigate and develop their U.S. infrastructure and expand into the U.S. market. He leverages his extensive network of investors, advisors, government agencies and business leaders throughout the U.S. to bring strategic benefits to these organizations. He has won international awards, including being an Irish American Wall Street 50 honoree, and has spoken at many prestigious international conferences and events. Ciarán is also an avid golfer.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.