In the recent video, the prominent crypto trader Mike Jenkins from Coin Bureau discusses the potential risks that lie beneath the surface of stablecoins and how they impact the price of Bitcoin.
Stablecoin Overview
Stablecoins are cryptocurrencies that are pegged one for one to the value of another asset. In most cases, this is a fiat currency like the US dollar. According to the trader, stablecoins can maintain their peg thanks to two separate mechanisms:
“The first is decentralized stablecoins that rely on collateralized debt and smart contracts to maintain their peg. The second is centralized and fiat-backed stablecoins that hold a certain amount of cash in a bank to make sure the currency is backed one to one”.
He adds:
“Despite how revolutionary decentralized stablecoins like DAO, they still do have their problems. People still feel a lot more comfortable knowing that the stablecoin they hold is physically backed by some cash somewhere”.
Despite the explosion in the issuance of other stable coins Tether remains the most popular and most controversial stable coin out there.
Stablecoin Risks
There are a number of risks that are posed with stable coins. Among those, Jenkins believes that the most important of these is what is more generally termed a run on the bank.
“It’s a situation where all of those who have the stable coin in question will rush to withdraw all at the same time. This could be a result of some sort of lack of confidence in the stable coin in question”.
Moreover, the reserves that are backing up stablecoins are not always completely liquid. There are also a number of sparks which could lead to this “Bank run” scenario on the market. These include regulatory crackdowns and other stringent actions.
China & Tether
According to the trader, one of the biggest regulatory risks coming from one of the biggest Tether markets out there and that would be China.
“Ever since China cracked down on Yuan-Bitcoin trading back in 2017, a massive market has opened up for USDT-Bitcoin trading”.
The reason for this is because Tether has been one of the primary sources that Chinese OTC dealers used to be able to operate their businesses, even despite those fears on options.
Over the past 4 years, the Chinese regulators have let it slide as the market mushroomed. However, they have begun a hard crackdown on crypto in the country. And China now has a strong incentive to crack down on the trading of all cryptocurrency.
“Mass amounts of USDT being dumped on the market could hammer its price and drive it off the peg”.
At the end of the video, the analyst points out that while a Chinese ban is a risk, he doubts it would have that much of an impact. This mainly comes down to one. Simple fact, it’s a decentralized stable coin that’s issued on an open-source platform.
“You can’t ban it unless you completely shut down your internet. And even then the moment you switch it back on again, people will start transacting”.
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