Crypto Economy

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Token Stability in a Crypto Economy

Dick Bryan and Akseli Virtanen:

"Advocates of stablecoins might say that the volatility of crypto-currencies stops them operating as a store of value. This is a little outdated idea. Traditionally, ‘cash’ (meaning fiat money) was posed as the safest store of value because it is definitionally the most liquid asset and the state underwrites its value. States cannot preclude inflation and deflation, so it is not possible to secure absolute stability (the social intruding) but they can spend massive resources attempting to. And treasury bonds were, by the same reasoning, the longer-term safe store of value.

But those are dated notions, and not just from the perspective of cryptocurrencies. While cash and treasury bonds are always elevated in safety status because of state backing, they have of recent times been attached to negative returns (deflation; negative interest rates). To put it bluntly: the old definitional privileging of state cash and treasury bonds as ‘safe’ and hence desirable to hold is being challenged.

Increasingly, financial markets understand stability in a different way:

Not looking for stability in the value of individual assets in isolation, but in holding a portfolio of non-correlated assets, none of which is individually stable, but where volatilities of different assets follow different patterns, balancing out the different volatilities, as it were, and Holding derivative positions to hedge against the portfolio’s overall volatility.

In this framing, crypto-currencies take their place in a spectrum of asset classes that, in combination, simulate a chosen level of value stability. The role of crypto assets in this approach to stability is still evolving and depends on:

a) Crypto assets having a volatility that cycles differently from, say, the stock market, property and the values of asset-backed securities

b) Crypto assets being integrated into the portfolios of investment banks, hedge funds and pension funds.

Each of these dimensions requires greater maturity in crypto asset markets. We are not there yet, but it will happen." (