Stablecoins Vs. CBDC: Will it Effect Crypto Markets a Year from Now?

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USD backed Stablecoins have overtaken the transaction volume of Bitcoin and Ethereum. Moreover, analysts are also witnessing a wind of change towards Central Bank Digital Currencies (CBDC). As FIAT money begins to compete with crypto directly, there is massive uncertainty on its effect on Bitcoin. 

The stablecoins are leaving begin crypto in trading volumes and even velocity. It measures the rate of turnover of supply, and stablecoins have had larger units supplied in the last one year. A combined report by Coinmetrics and Bitstamp reveals.

While BTC and ETH velocities are between 4 and 6, stablecoin velocities mostly range between 25 and 50.

Question Around Stability of Stablecoins

However. stablecoins aren’t really stable enough. Many of these are not backed 1:1 by USD, and the DeFi based stablecoins are DAI is entirely different with respect to their basics. These are different markets which create separate demand and supply for each of these stablecoins. The research finds that,

The price of most stablecoins jumped up to between $1.03 and $1.06 from 2:00 to 6:00 UTC on March 13th.

stablecoins fluctuation
Price Fluctuation in Stablecoins during COVID-19 Market Crash (Source

This premium in currency prices exists in the real markets as well. However, they must not exist between different protocols representing the same currency. A central bank-issued cryptocurrency will be pegged rather strongly to the price than a plethora of experimental protocols.

Because of their nature as price-pegged assets, deviations in stablecoin prices create arbitrage opportunities. For example, when a stablecoin’s price is above $1, new supply can be printed at $1 each, and then sold on an exchange for a profit.

Nevertheless, since 2015, they have served as a medium to engage millions of crypto users and traders. Without stablecoin and crypto exchanges, the growth of Bitcoin and crypto in the financial world would have been very limited. The report states,

Ultimately, stablecoins are a new gateway to crypto user adoption and a crucial part of the burgeoning ecosystem. However
crypto evolves in the upcoming years, stablecoins will undoubtedly be a large part of the picture.

Central Bank Digital Currency (CBDC)

The Chinese have come far ahead with their digital currency plans. Its local adoption has begun and soon could see international transfers and wider applications of blockchain within the country.

The way China is moving things around blockchain, the US and Europe might have to follow them soon enough. Mati Greenspan, crypto analyst and founder of Quantum Economics tweeted,

Not sure if it’s a good thing or not but it’s definitely happening. By this time next year, all central banks will have some form of digital money.

While stablecoins have acted as onramps so far, the question remains as to whether the tremendous supply (over $11.2 billion currently) will spill over to cryptocurrencies and how would the banks fare in the competition.

How do you think CBDC worldwide will affect crypto markets? Please share your views with us.