We blindly accept that the scraps of paper in our wallets have value and that a dollar we make today will still be a dollar tomorrow, but history demonstrates that we shouldn’t count on fiat to hold value over time.
Cryptocurrencies attempted to resolve many of the big issues pertaining to fiat currencies, mainly that they require government backing and banks to validate transactions. However, even Bitcoin and Ethereum remain incredibly volatile. As global payments move increasingly to mobile, cryptocurrency will inevitably become more relevant, underlining the need for a stablecoin solution that will protect people from losing the value of their holdings.
Why money matters
Coins made of precious metals first came into use as a method of payment around 660 BCE and held the same value as the materials of which they were composed. The invention of paper notes is attributed to Emperor Chen Tsung of China who issued redeemable bills to merchants circa 1023. Since these first redeemable bills, people around the world have trusted paper money, but this trust is inextricably linked to trust in the issuing government.
Even after the United States went off the gold standard in 1933, marking the dollar as a fiat currency, the world continues to trust the value of American dollars even though they have no real backing. Part of the basis for this near universal value is that the international community retains faith that the United States will repay its loans. The mounting national debt, currently exceeding $22 trillion, raises concerns among economists who understand that the bigger the debt, the more difficult it is to repay it.
USD is not a stable, long-term solution
Despite these concerns, the dollar has retained stability relative to other world currencies and so continues to be a global standard. In fact, at least 66 countries peg their value to the dollar, meaning the value of their currencies are maintained at a fixed exchange rate to the US dollar. Though the dollar is considered one of the most stable national currencies, it is far from an ideal solution.
Countries with dollar pegs find it difficult to maintain a stable value, because the dollar’s value is constantly changing. Additionally, USD is a fiat currency, and so is bound to depreciate in value each year due to inflation. The dollar has inflated cumulatively about 105% over the past 30 years, so an item that cost $1 in 1989 would cost about $2.05 today. Furthermore, economists like hedge fund manager and billionaire investor Ray Dalio warn that the next financial crisis could be worse than the last. If that’s the case, holding value in USD will not protect people from potentially catastrophic losses.
Crypto solved one problem but created another
The core idea behind cryptocurrencies originally introduced by the Bitcoin white paper is the invention of cashless, peer-to-peer payments that do not require verification by banks or backing by any government. By eliminating the need for any centralised intermediary, crypto enthusiasts hope borderless currencies could form the foundation for a more democratic, global economy controlled by individuals instead of governments and banks.
Problematically, even the most well-known cryptocurrencies remain incredibly volatile.
Bitcoin, for example, was worth $1,000 in January of 2017, hit $20,000 before the end of the year, and now lingers around $8,500. Such volatility makes cryptocurrency a risky investment and means that companies conducting raises in crypto must be incredibly careful about managing those funds.
Unfortunately, many ICOs that conducted their raises in ETH in 2017 and held the value in ETH lost large percentages of the original value generated because of price drops. To put this in context, if a company completed a raise of $10 million in ETH on December 31 2017 when ETH closed at a value of $756.73, that company would hold around $3.5 million today based on recent prices.
That’s a dramatic loss of value that the project can no longer utilise for development of its product, including payments to developers, marketing, and other business costs.
Combining the best of crypto and fiat: Decentralisation meets predictability
The issue of volatility is not unique to cryptocurrencies. Hyperinflation of more than one million percent in Venezuela has led to mass unemployment, riots, starvation, and a health crisis because people cannot afford to buy food or pay for basic medications. In the last 25 years, 28 countries have experienced hyperinflation.
Examples such as these underline the importance of a stablecoin solution and non-flationary financial index that can combine the empowerment enabled by decentralisation with an even more predictable level of stability than USD and other fiat currencies currently offer.
By Daniel Popa, Founder & CEO of Anchor
About Daniel Popa:
Daniel Popa is the Founder and CEO of Anchor, a new financial standard that aims to preserve and enhance the value of investor holdings. As a serial entrepreneur, Daniel has launched 12 companies in the fields of software development, telecommunications, and technology. Prior to Anchor, he developed new models for outdated systems and VOIP networks, which led to the creation of his first company, NECC, that grew to more than 600 employees in the US and several thousand contractors around the world. NECC revenues reached approximately $54 million per year after just two years.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.