Stablecoins are even stabler.
The Office of the Comptroller of the Currency, the division of the U.S. Treasury that’s responsible for ensuring a safe banking system, recently issued a letter to banks on how to think about blockchain-based stablecoins.
In a nutshell: They recommend that banks think about stablecoins like any other kind of stored value, such as debit cards, checks, or electronic transfers. The letter guides banks to think of stablecoins as a new kind of payment technology, since banks have always adopted “new ways of conducting the very old business of banking.”
Stablecoins are just another way of sharing money.
The letter goes further, by indicating that banks can serve as a node on a blockchain. (They use the term Independent Node Verification Network, or INVN, instead of the more user-friendly “blockchain.”)
This opens the door for banks to not just hold stablecoins, but to become full nodes: to invest in all the hardware and software needed to create electronic “vaults” to hold vast sums of stablecoin wealth. (Maybe they’ll even start mining bitcoin!)
Then the letter goes even further, by saying that banks might issue stablecoins themselves. With this, the door is open for banks to essentially mint their own blockchain-based tokens. (J.P. Morgan, of course, is already doing it.)
This is all written as an “interpretive letter,” not law. It’s meant as guidance for how banks might think about this new world of blockchain investing. But the guidance is good.
It tells us stablecoins are just another way of sharing monetary value. But the letter mentions they have one more critical use: stablecoins serve as on-ramps and off-ramps to the digital economy. They serve as a way to transfer wealth between the “stock market” and the “block market.”
Why We Need Stablecoins
If you’re new to this space, a stablecoin is a digital asset that always holds its value, typically against the U.S. dollar. The top stablecoins currently include USD coin (USDC), DAI (DAI), tether (USDT), binance USD (BUSD), and paxos standard (PAX).
Today, these stablecoins are holding over $9 billion in value.
If stablecoins are designed to be stable -- to always be worth $1.00 apiece -- you can’t make money with them. (In fact, you’ll slowly lose money to inflation, just like holding cash.) But they are extremely useful, because they allow you to hold value without switching back and forth between regular money and digital money.
Let’s say the price of bitcoin reaches $50,000. “Woo!” you think to yourself. “This market is getting pretty hot.” You sell a bitcoin to lock in the profit, but you don’t want to cash out to U.S. dollars. So you hold your $50,000 in a stablecoin, and when bitcoin goes down in price (let's say to $35,000), you buy it back again.
This is exactly how traders are using stablecoins today. And the demand for these stablecoins is insane, because these markets are still so young and inefficient that the traders have figured out a hundred ways to make money in them. But they all require stablecoins.
This is why DeFi markets are able to pay out such high interest rates: your bank can offer you less than 1% interest on a savings account, but DeFi markets will pay you 3.5% to use your money -- and sometimes much more.
In other words, we now have two systems of money. We talk about these in different ways:
Stablecoins act as a “bridge” between these two worlds: the traditional economy and the digital economy. They’re like a translation layer.
You want to play the videogames at Dave & Busters, you buy a Dave & Busters card and load it up with credits.
You want to give your dad something from Home Depot, you buy him a Home Depot gift card.
You want to mail some money to a friend but don’t want to send cash, you send a Visa card.
These are all similar ideas: they’re different ways of sending and storing value, of converting traditional dollars into digital wealth.
But here’s the most important thing about these examples: they all play nice with the government.
How to Get Along with Government
Don't threaten the money supply.
Governments need to control the money, because money controls everything else. Jobs, trade, military, infrastructure, you name it: they all require a national currency that’s strong and healthy.
When new forms of value arise, new world powers can arise. It can radically shift the balance of power: from the rise of banking in the early Roman Empire, to the rise of Dutch merchant banks in the 17th century, to the post-World War II rise of the U.S. dollar as the world's reserve currency.
Witness Facebook’s attempt to launch their own digital currency: since the company reaches a third of the planet, this would turn Facebook into a sovereign power overnight. (Governments reacted swiftly and strongly – so Facebook’s current plan is simply to launch a new stablecoin.)
What we’ve learned is that creating "new money" is a real problem for governments, especially if that new money gets used by a lot of people. But using the traditional money supply in new ways is OK. That’s the real takeaway from the OCC letter.
I will leave you with a question to ponder. Bitcoin has created a huge amount of wealth: $700 billion as I write this. Many institutional investors are now buying bitcoin, calling it “digital gold.” Since perception creates reality, imagine the price of bitcoin keeps going up, until it equals the supply of actual gold (we’ll call it $7.5 trillion).
All things being equal, that means the price of bitcoin would be about 10 times where it is now. It also means that the balance of the world’s wealth could shift radically. (The Winklevoss Twins might be able to buy a small country.) As the wealth shifts, so will the balance of power.
What happens then?
Greener, Smarter, Fairer
I hope that the new bitcoin billionaires will help create a world that is “greener, smarter, and fairer," in other words, focusing on the good of the whole – not just a privileged few.
This may sound utopian, but Utopia’s a pretty good place to live. (They have good school systems.) I look at the huge sums of money given by the Rockefeller family, and more recently Bill and Melinda Gates: these funds have been used to eradicate disease, improve education, and relieve poverty. They have improved the world.
Like the bitcoin billionaires, these people made their money in new markets, then used it for huge public moonshots to do things that governments can’t (or won’t), like eradicating malaria, developing new farming technology, or getting birth control to women in developing nations.
Increasingly, our problems are global.
Blockchain is global money.
It can help fix these global problems, if we put it to use the right way: solving problems that affect the planet as a whole like climate, healthcare, and education.
The new guidance on stablecoins is a big step forward, because banks will feel more free to participate in the blockchain economy. Once you’re in stablecoins, you’re in the new economy. And once you’re in the new economy, the world gets better. It's literally what the world wants.
Health, wealth, and happiness,
John Hargrave
Publisher
Bitcoin Market Journal
Hi Everyone,
Here we are going into what is almost sure to be another exciting weekend in the crypto market.
High volumes during unusual trading hours was certainly a hallmark of the 2017 bull run.
At the time, it was largely assumed that because the rally was being driven by retail investors, it stood to reason that a bulk of the action would happen during late night hours and on the weekends, when people were off of work and had more time to play around with magic money on the internet.
A funny thing happened recently though that kind of puts that old assumption to the test. Volumes started picking up on the weekends.
Over the last month, since breaking the all-time high of $20,000 in mid-December, price action has been strong accompanied by strong volumes during every weekend.
The clearest evidence of this can be seen in the CME gaps, where Wall Street traders are no doubt chapfallen at missing out on a bulk of the action.
Another clear example we can see here in this graph is that on Christmas eve, bitcoin exchange volumes neared their highest level for the month of December, surpassed only on the morning of Sunday, Dec. 27.
So, if this rally is being driven by institutional investors, how can we possibly explain the strange hours the market seems to be keeping??
Last Friday there were several articles in the mainstream media, including one by our good friends at Bloomberg, which delved into some of the possible reasons for this phenomenon, but making any concrete conclusions would be very difficult at this time.
One of the common theories is that because liquidity is lower during the weekend, it could be conducive to greater volatility, meaning that if the market is not liquid enough to absorb the higher volumes, then it must respond with volatility.
However, this wouldn't explain if and why liquidity is actually lower during the weekends, and it certainly would not explain the volume spikes at odd hours. Liquidity is a notoriously difficult metric to quantify.
The second theory that may be playing out is that our new friends, the suits from the Street, are adapting to trading this unique 24/7 market by themselves being more available during that time, or at least instructing their interns to be.
Last but not least, is the evidence that the retail traders are now back in the market and approaching 2017 levels.
We're hearing this both personally and publicly from exchanges to wallet providers, who are once again seeing unprecedented levels of interest from the general public.
Here's a fascinating interview with Yoni Assia, my personal crypto mentor and the CEO of eToro, responding to the recent spikes in crypto trading they're seeing in the platform and the state of liquidity in the market.
In short, as we continue through this bullish cycle, for whatever reason, it seems likely that weekend volatility is here to stay.
If you ask me, according to the rules of capitalism, the strange dynamic is the one where markets keep rigid hours.
Apple shares don't have a desk job, and they should be free to react whenever updates occur or whenever the market dictates. So the fact that the bitcoin and crypto markets are free to choose their respective busy and idle times is only natural.
Wishing you an exciting weekend