We do the research, you get the alpha!
When Apple brought out the iPad, nobody really understood what it was for. Yet Apple revealed on October 30 that it has sold 400 million of the halfway houses, overtaking sales of HP and Lenovo computers over the last year.
Now stablecoins are the latest budding technology that people are scratching their heads at. Why would someone build a digital clone of a stable fiat currency like the dollar or pound? Who on earth would invest in a token that has no possibility of going up in price because its value is pegged to a fiat currency? It’s not like there are just a few of them knocking around, either. At last count, there’s more than 120 of them, all competing to be this newfangled electronic dollar. So, what do the creators of this nascent product know that we don’t, and why on earth are people investing in them?
Historically, creators of coins have made millions, or in some cases, billions by mining early and then waiting until the coin price is high before selling. Satoshi, if he is still alive, is estimated to own 980,000 Bitcoin putting him/her/it in the top 50 of the world's wealthiest people. Charlie Lee sold his Litecoin near its all-time-high. Even Jed McCaleb was forced to become a billionaire because he was sued by Ripple to not sell his XRP. While this isn’t arguably the most ethical way to make money, many coin creators purposefully hold back large supplies of coins as a quick way to mega-wealth. But if a stablecoin does reach the moon, something has gone seriously wrong–so how do the founders make money?
In short, they don’t. Nevin Freeman, founder of stablecoin Reserve Protocol, says that most issuers are just trying not to lose money. If anything, stablecoins have to pay for the developers to create and manage the tokens, in addition to paying market makers to provide liquidity. They don't even redeem money through transaction fees, as miners do on other networks. But, it seems the stable makers are playing a longer game.
Stablecoins, according to Ben Dives, CEO of the London Block Exchange, bring added value to the company that issues them and helps raise awareness of other, more lucrative products the company might be trying to sell. They're basically a lure to attract passing trade.
Todd Clyde, COO of Token, a financial compliance company with its own stablecoin, says when his company started out, they received initial support from venture capitalists because of the income they could make by acting as a cross-border payments service. By charging lower fees than regular banks do for moving fiat cash, and speeding the whole process up, Token profits. That money is then used to cement its image as a bulwark for keeping your crypto safe from volatile coins. Clever. But stablecoins have other tricks up their sleeves, too.
“The value’s not in the coin, the value’s in the company. We raise money from traditional venture capitalists. The upside for them is we’re reinventing payments through open banking and digital currency providing the end-to-end solution.”Todd Clyde, COO of Token.
Huobi, an exchange, believes its stablecoin will bring more users to its exchange so it can profit from trading fees. Daniel Neetzel, founder of NOS.cash, says that its US dollar-based stablecoin does well because the US economy is on the rise, enabling it to skim off the interest rates. “We make 100 base points in interest rates and we have a cash-out fee,” which is jargon for the company makes money just by holding large amounts of cash, and charges anyone who wants to take their money out. But it's not just the stablecoin minters making a mint.
Market makers, individuals and/or groups who inject liquidity into a marketplace to keep prices stable get paid, too. Mitchell Dong, managing director at Pythagoras Investment, says: “We are being offered financial incentives both from the stablecoin issuers as well as the exchanges. To get distribution, they’re paying market makers to distribute.”
As most stablecoins have low volume, compared to Tether, liquidity is required for the coin to stay stable. As a result, market makers not only profit from buying below one dollar and selling above it, but are getting paid to do so.
So, why are there so many stablecoins? Because, dear boy, there's money up in them secure hills.