14 August 2025
20 June 2025
Stablecoins
Stablecoins, by their very definition, are cryptocurrencies designed to minimize price volatility, ideally pegging their value to a stable asset like the US dollar or a basket of fiat currencies. They aim to bridge the volatile world of cryptocurrencies with the traditional financial system, offering a digital medium of exchange that avoids the wild price swings of Bitcoin or Ethereum. However, despite their name and design intent, stablecoins have on several occasions demonstrated significant instability, challenging the core premise of their existence and raising serious questions about their long-term viability and regulatory oversight.
One of the primary reasons for stablecoin instability lies in their collateralization models. There are broadly two types: fiat-backed and algorithmic. Fiat-backed stablecoins claim to hold an equivalent amount of traditional currency or cash equivalents in reserve for every coin issued. The instability here can arise from insufficient or questionable reserves. If an issuer does not maintain a 1:1 backing, or if the assets held are not truly liquid and readily convertible to the pegged currency, a sudden surge in redemption requests (a "bank run" scenario) can lead to a de-pegging event. The trust in the issuer's transparency and auditing of these reserves is paramount; any doubt can trigger panic and sell-offs, as seen with some past stablecoin fluctuations where the reserves were later found to be less robust than initially claimed.
Algorithmic stablecoins, on the other hand, attempt to maintain their peg through a complex system of smart contracts that automatically adjust supply and demand, often involving a second, volatile cryptocurrency as a balancing mechanism. The inherent flaw in many of these models is their reliance on market confidence and the ability of their algorithms to respond to extreme market conditions. If the auxiliary token loses significant value or if there's a large, sudden outflow of capital, the algorithmic mechanism can break down, leading to a death spiral where both the stablecoin and its balancing token plummet in value. The most prominent example of this was the dramatic collapse of TerraUSD (UST) in May 2022, which lost its dollar peg and, along with its sister token LUNA, wiped out billions in investor capital, demonstrating the fragility of purely algorithmic stability mechanisms.
Furthermore, regulatory uncertainty and external market shocks contribute to stablecoin instability. The lack of clear, consistent regulation across different jurisdictions means that stablecoin issuers operate in a legal gray area, which can expose them to legal challenges or sudden policy changes that impact their operations. Moreover, the broader cryptocurrency market is highly interconnected. A significant downturn in major cryptocurrencies can create a contagion effect, leading investors to flee even seemingly stable assets, putting immense pressure on stablecoin pegs as people rush to convert them back to fiat. This shows that stablecoins, despite their design, are not entirely insulated from the volatility of the broader crypto ecosystem.
While stablecoins aspire to provide a safe haven within the volatile crypto market, their stability is often an illusion, susceptible to various vulnerabilities. Issues stemming from inadequate or opaque collateralization, the inherent design flaws of algorithmic models, and broader market and regulatory pressures can all lead to de-pegging events. For stablecoins to truly live up to their name and become a reliable component of the future financial landscape, they require robust and transparent collateral, resilient economic models, and comprehensive regulatory frameworks that instill genuine trust and confidence.
17 May 2025
Bitcoin and Stablecoin
Bitcoin and stablecoins, while both operating within the realm of cryptocurrency, serve fundamentally different purposes and possess distinct characteristics. Bitcoin, the pioneering cryptocurrency, was introduced in 2009 as a decentralized digital currency, aiming to operate independently of traditional financial institutions. Its value is determined by market forces of supply and demand, leading to significant price volatility. This volatility, while offering opportunities for speculative investment, makes Bitcoin less suitable for everyday transactions and as a stable store of value.
Stablecoins, on the other hand, are designed to mitigate the price volatility inherent in cryptocurrencies like Bitcoin. They achieve this by pegging their value to a more stable asset, such as fiat currencies (e.g., the US dollar), commodities (e.g., gold), or other cryptocurrencies. This pegging mechanism ensures that the value of a stablecoin remains relatively constant, making it more practical for use in daily transactions, as a medium of exchange, and as a store of value. There are several types of stablecoins, including those backed by fiat currency reserves, those collateralized by other cryptocurrencies, and algorithmic stablecoins that use algorithms to control supply and maintain the peg.
One key difference lies in their intended use cases. Bitcoin was initially envisioned as a peer-to-peer electronic cash system, but its volatility has led to its adoption primarily as a store of value, akin to "digital gold," and as a speculative investment. While some businesses accept Bitcoin, its price fluctuations make it challenging for merchants to price goods and services. Stablecoins, with their price stability, are better suited for use in everyday transactions, facilitating seamless and cost-effective payments, particularly in cross-border transactions. They are also integral to the decentralized finance (DeFi) ecosystem, providing liquidity and serving as a stable medium for trading and lending.
Another major difference is in their underlying mechanisms and volatility. Bitcoin operates on a decentralized blockchain network, with its value subject to market dynamics, leading to high volatility. This volatility is driven by factors such as investor sentiment, regulatory developments, technological advancements, and macroeconomic conditions. Stablecoins, by design, sacrifice some degree of decentralization to achieve price stability. They rely on centralized entities (in the case of fiat-backed stablecoins) or algorithms to maintain their peg, reducing volatility significantly.
Looking ahead, both Bitcoin and stablecoins have promising yet uncertain futures. Bitcoin's future is tied to its adoption as a store of value and its potential integration into the broader financial system. The development of scaling solutions, such as the Lightning Network, and increasing institutional interest could enhance its utility and drive further adoption. However, regulatory scrutiny, competition from other cryptocurrencies, and concerns about its energy consumption pose challenges to its widespread acceptance. Some predict Bitcoin will reach new highs, driven by scarcity and increasing institutional investment, while others caution about potential declines due to regulatory tightening or the emergence of superior technologies.
Stablecoins, on the other hand, are poised for significant growth, driven by their increasing use in payments, remittances, and DeFi. The demand for stable, digital assets is rising, and stablecoins are well-positioned to meet this demand. The integration of stablecoins into mainstream financial systems, the development of robust regulatory frameworks, and technological advancements will further drive their adoption. However, regulatory uncertainties, concerns about the reserves backing stablecoins, and the potential for systemic risk remain key challenges. The future of stablecoins will likely involve greater regulatory oversight, increased transparency, and the development of more robust mechanisms to ensure their stability and security.
28 December 2024
How do Bitcoin Wallets Work In Simple Terms?
Bitcoin Wallet: Digital vault for Bitcoin which stores the keys to bitcoins that allow you to manage and access. A wallet is a keychain and the Bitcoin like scattered houses in the world. The keys on the keychain unlock those houses. There are two types of keys: Public and Private. Public key is the address to house which is shareable. Private key is the secret key that only you know to prove ownership and authorization.
How it works?
- Generate Keys when you create Bitcoin wallet with both public and private keys
- Receive Bitcoin by sharing your public key
- Sending Bitcoin by using your private key
- Back up your wallets for access recoverability
14 December 2024
14 November 2024
Drawbacks of Bitcoin
Bitcoin has been gaining in popularity as of late. However, it has fundamental downsides that means diversification with minimizaton of risk is key. The below highlight some common drawbacks of Bitcoin investing.
- Extreme Volatility - Bitcoin is highly volatile with rapid fluctuations in market sentiment.
- Regulatory Uncertainty - Bitcoin has an uncertain trajectory with significant impact on value from regulatory changes that are still evolving.
- Security Risks - Bitcoin wallets and exchanges are targets for hackers. If you lose access to wallet or it is compromised you could lose your investment.
- Lack of Intrinsic Value - There is no intrinsic value. It is difficult to measure the asset value of Bitcoin in real terms. The value is derived from demand and speculation.
- Energy Consumption - Bitcoin is a drain to the environment with a growing energy footprint.
- Limited Acceptance - Bitcoin is not widely accepted form of payment and has limited use cases.
- Psychological Risks - Bitcoin is emotionally draining due to high price fluctuations.
- Tax Implications - Bitcoin investing comes with complex tax implications that vary by jurisdiction which means understanding your tax obligation can be tricky.