Importance of cryptocurrencies which mimic fiduciary currencies
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Why do cryptocurrencies need cryptocurrencies that replicate fiduciary currencies? Why did the potential "death" of the Tether (a cryptocurrency which replicated US dollar values) hurt cryptocurrencies so much at the end of January / beginning of February 2018?
Active traders who trade in cryptocurrencies provide liquidity on each trading platform. When they speculate on the rise of a cryptocurrency it is very convenient for them to have a cryptocurrency which mimics a currency when closing their positions. Why is that? Because the cryptocurrency trading platforms do not give returns in euros or dollars directly. Only cryptocurrency purchasing platforms do this, but they only have a few cryptocurrencies to trade.
Without a cryptocurrency which mimics cash, traders would still have only one solution to go back to "fiat": reselling their cryptocurrencies for Bitcoins, then transferring them to their cryptocurrency purchasing platform, then reselling their Bitcoin or Ethereum for dollars or euros.
This solution is very/too long for active traders. Each transfer wastes traders’ precious time and they become less reactive for quickly taking up opportunities to buy altcoin on their trading platforms. Why is that? Because to have these funds on the trading platform, traders would have to repeat the whole transfer procedure, i.e. buy Bitcoins on their buying platforms, then transfer them to the cryptocurrency trading platform, to finally be able to buy the cryptocurrency they want.
Even if cryptocurrency trading platforms offer all cryptocurrencies which are directly exchangeable against a cryptocurrency which mimics cash, they generally always have Bitcoin or Ethereum ahead of that cryptocurrency; so traders can quickly exit a position for Bitcoins, then resell Bitcoins for the cryptocurrency which mimics cash.
Let's have another look with an example:
Imagine a trading platform offering the following pairs: NEO/BTC and BTC/USDT where USDT is the cryptocurrency mimicking the US dollar at par (1 USDT = 1 USD). A trader has bought NEO but wants to exit his position quickly. He can sell his NEO for BTC, then buy USDT with his BTC. NB: if the platform allows him to trade the NEO/USDT pair he could switch back to USDT in a single transaction.
If his trading platform does not offer him the USDT (Tether), this trader is obliged to transfer his BTC to his cryptocurrency purchasing platform; where he is then able to change them into euros or US dollars.
And staying with Bitcoins on the trading platform, is this a solution after selling NEO? No. The trader would find himself speculating on Bitcoin, which continues to fluctuate against the euro and the US dollar.
Conclusion:
Without a cryptocurrency that mimics a fiduciary currency, cryptocurrency trading volumes on the trading platforms are likely to decline considerably, causing a fall in the price of all tradeable cryptocurrencies.
Without a cryptocurrency which mimics a cash currency, the only solution would be to use cryptocurrency trading platforms which ultimately offer trading directly in euros or US dollars. But they would then become a cryptocurrency purchasing platform (much more controlled.)
Reminder: Do you understand the difference between a cryptocurrency trading platform and a cryptocurrency purchasing platform? If not, I suggest that you look at this article: TUTO - Buying and trading cryptocurrencies.
Why do cryptocurrencies which mimic cash currencies at parity have difficulty surviving?
To ensure parity with a cash currency, the replicating cryptocurrency must normally have an amount equivalent to its capitalisation, in the cash currency it mimics, on its bank account.
Simply put, Tether mimics the US dollar; it is currently capitalized at US$2 billion, Tether must therefore have US$2 billion in a bank account (in case all the Tether holders decide to convert Tethers back into US dollars at the same time).
Problem: the more a cryptocurrency which mimics a cash currency is used, the more it capitalizes, and the more it needs to have a large amount of the currency in stock. This is the problem encountered by Tether (USDT) which saw its capitalization increase from 100 million to 2 billion US dollars in just a few months.
If the cryptocurrency no longer manages to store (reserve) a sufficient amount of cash, it no longer guarantees its exchange rate solvency and risks exploding at any time. And that's without counting market supervisory agencies’ assignments.
There is only one solution for these cryptocurrencies which mimic a cash currency: apply huge charges on each cryptocurrency transaction, in order to accumulate a sufficiently large amount in reserve to guarantee their solvency in the cash currency. But then using this cryptocurrency would immediately become much less attractive.
Active traders who trade in cryptocurrencies provide liquidity on each trading platform. When they speculate on the rise of a cryptocurrency it is very convenient for them to have a cryptocurrency which mimics a currency when closing their positions. Why is that? Because the cryptocurrency trading platforms do not give returns in euros or dollars directly. Only cryptocurrency purchasing platforms do this, but they only have a few cryptocurrencies to trade.
Without a cryptocurrency which mimics cash, traders would still have only one solution to go back to "fiat": reselling their cryptocurrencies for Bitcoins, then transferring them to their cryptocurrency purchasing platform, then reselling their Bitcoin or Ethereum for dollars or euros.
This solution is very/too long for active traders. Each transfer wastes traders’ precious time and they become less reactive for quickly taking up opportunities to buy altcoin on their trading platforms. Why is that? Because to have these funds on the trading platform, traders would have to repeat the whole transfer procedure, i.e. buy Bitcoins on their buying platforms, then transfer them to the cryptocurrency trading platform, to finally be able to buy the cryptocurrency they want.
Even if cryptocurrency trading platforms offer all cryptocurrencies which are directly exchangeable against a cryptocurrency which mimics cash, they generally always have Bitcoin or Ethereum ahead of that cryptocurrency; so traders can quickly exit a position for Bitcoins, then resell Bitcoins for the cryptocurrency which mimics cash.
Let's have another look with an example:
Imagine a trading platform offering the following pairs: NEO/BTC and BTC/USDT where USDT is the cryptocurrency mimicking the US dollar at par (1 USDT = 1 USD). A trader has bought NEO but wants to exit his position quickly. He can sell his NEO for BTC, then buy USDT with his BTC. NB: if the platform allows him to trade the NEO/USDT pair he could switch back to USDT in a single transaction.
If his trading platform does not offer him the USDT (Tether), this trader is obliged to transfer his BTC to his cryptocurrency purchasing platform; where he is then able to change them into euros or US dollars.
And staying with Bitcoins on the trading platform, is this a solution after selling NEO? No. The trader would find himself speculating on Bitcoin, which continues to fluctuate against the euro and the US dollar.
Conclusion:
Without a cryptocurrency that mimics a fiduciary currency, cryptocurrency trading volumes on the trading platforms are likely to decline considerably, causing a fall in the price of all tradeable cryptocurrencies.
Without a cryptocurrency which mimics a cash currency, the only solution would be to use cryptocurrency trading platforms which ultimately offer trading directly in euros or US dollars. But they would then become a cryptocurrency purchasing platform (much more controlled.)
Reminder: Do you understand the difference between a cryptocurrency trading platform and a cryptocurrency purchasing platform? If not, I suggest that you look at this article: TUTO - Buying and trading cryptocurrencies.
Why do cryptocurrencies which mimic cash currencies at parity have difficulty surviving?
To ensure parity with a cash currency, the replicating cryptocurrency must normally have an amount equivalent to its capitalisation, in the cash currency it mimics, on its bank account.
Simply put, Tether mimics the US dollar; it is currently capitalized at US$2 billion, Tether must therefore have US$2 billion in a bank account (in case all the Tether holders decide to convert Tethers back into US dollars at the same time).
Problem: the more a cryptocurrency which mimics a cash currency is used, the more it capitalizes, and the more it needs to have a large amount of the currency in stock. This is the problem encountered by Tether (USDT) which saw its capitalization increase from 100 million to 2 billion US dollars in just a few months.
If the cryptocurrency no longer manages to store (reserve) a sufficient amount of cash, it no longer guarantees its exchange rate solvency and risks exploding at any time. And that's without counting market supervisory agencies’ assignments.
There is only one solution for these cryptocurrencies which mimic a cash currency: apply huge charges on each cryptocurrency transaction, in order to accumulate a sufficiently large amount in reserve to guarantee their solvency in the cash currency. But then using this cryptocurrency would immediately become much less attractive.
