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How Stablecoin Innovation Could Offer a Hedge Against Inflation

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How Stablecoin Innovation Could Offer a Hedge Against Inflation

Industry insiders once touted Bitcoin as an inflationary hedge, but economic reality has called this logic into question. Can a stablecoin provide the solution that Bitcoin can not?

Today Bitcoin is trading at $19,686, down 71.4% from its all-time high of $69,044 last Nov. With many countries around the world experiencing inflationary problems, the expectation would be that the price of Bitcoin should be rising. That simply is not happening.

Has Bitcoin failed?

With inflation in the U.S. hitting 40-year highs, it appears as though Bitcoin has failed as an inflationary hedge. Instead BTC seems highly correlated to stocks, particularly technology stocks in the U.S.

This perception of Bitcoin’s failure is at once both right and wrong, and there is a slightly more complex answer to be found.

Steven Lubka, managing director of Private Client Services at Swan Bitcoin, offers a more nuanced take.

As Be[In]Crypto previously reported, Lubka explains that Bitcoin performs well against monetary devaluation or money printing. This is why the price of Bitcoin rose steadily throughout the COVID-19 pandemic when the U.S. government was printing lots of money.

Bitcoin performs less well against other types of inflation, such as when the price of goods rises due to supply chain disruptions, or scarcity caused by conflict. This second type of “inflation” is not true inflation, but to consumers it looks exactly the same.

It is a distinction that not everyone cares about, but Bitcoin holders should care, because it allows them to more accurately predict price trends for BTC. As for regular consumers, all they need to know is that their dollars, pounds, and euros are devaluing against the price of everyday food items and other purchases.

Enter the CPI-pegged stablecoin

One way to hedge against inflation could be for consumers to use stablecoins pegged to the value of goods. In theory, the purchasing power of these currencies would neither rise nor fall against items customers regularly shop for.

One company operating a stablecoin in this vein is Frax. The token they created for this purpose is the Frax Price Index Share (FPIS), and as you would expect, it is currently trading above the dollar at $1.39 per coin.

Sam Kazemian, the founder of Frax, believes this could be the next big idea in cryptocurrency. He calls it the non-state unit of account.

“I think the next largest sector in stablecoins will be the non-state unit of account,” Kazemian told Be[In]Crypto. “Stuff that’s actually stable to a basket of consumer items that people care about, so they can keep their standard of living the same.”

It’s a new and relatively young concept, but one which seems to already be growing in popularity. When we first spoke to Kazemian about a CPI-pegged stablecoin at the start of Aug, the market cap of FPIS was only a little above $60 million. Today it is within touching distance of $140 million.

Kazemian admits that the concept is still a little ahead of the market, but believes that over the next few years the idea will become widely accepted. In time, the founder even says that CPI-pegged coins could become “an alternative and successor to the state units of account.”

A compelling idea

For years consumers in the West have spent little to no time thinking about inflation. 

Today, that story is very different. The public is facing up to the fact that the value of their money is not what it once was. Offer them a form of cash that doesn’t devalue against goods over time, and you’ve got a pretty compelling sales pitch.

The issue for Kazemian and others is to convert that pitch into stablecoin users. It will be interesting to see how non-state units of account fare, and whether they can become one of the trends to drive the next crypto bull run.

Disclaimer

All the information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.

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Bit Coin

Grayscale Launches New Investment Product While Bitcoin Trust Crashes to 35%

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Grayscale Launches New Investment Product While Bitcoin Trust Crashes to 35%

Grayscale Investments is offering investors an opportunity to invest in Bitcoin mining hardware in the bear market.

The new investment opportunity, called the Grayscale Digital Infrastructure Opportunities LLC (GDIO), is now open to qualified individual and institutional investors, even as the asset manager allows ETF-related court proceedings to run their course.

Grayscale putting capital to work

Grayscale will use investor capital from the GDIO to buy mining hardware for a minimum of three years. It will use the hardware to mine and subsequently sell bitcoin. Mining is the energy-intensive process undertaken by a computer network to create a new transaction block and verify it. The node in the network that creates the block is known as a miner. A miner is rewarded in bitcoin for his effort, which typically requires large amounts of cheap electricity and computing power.

Part of the proceeds Grayscale will earn from its efforts will be paid out quarterly to GDIO investors.

“Grayscale’s unique position at the center of the crypto ecosystem enables us to create offerings that allow investors to put capital to work through differing market cycles,” stated Michael Sonnenshein, Grayscale’s chief executive.

GDIO represents another way the company has sought to provide investors with exposure to bitcoin without directly holding the asset.

Investors can also purchase shares from its GBTC trust and gain exposure to bitcoin through Grayscale’s legally regulated business in the U.S.

But Grayscale has a problem. Because investors cannot redeem shares in the trust for bitcoin, the price per share has dropped drastically, trading at a discount of 35% to its Net Asset Value. 

At the close of the trading day on Oct. 5, shares were trading at a shade over $12, despite being backed by $18.45 worth of bitcoin.

To mitigate this discount, Grayscale has pursued the conversion of GBTC into a spot bitcoin exchange-traded fund, which has so far been unsuccessful. The U.S. Securities and Exchange Commission denied the company’s latest application in June 2022, prompting Grayscale to pursue legal action against the federal agency. 

Nic Carter of Castle Island Ventures, a venture capital firm focused on early-stage public blockchain startups, said that Grayscale could wind down the ETF:

watching the GBTC discount. looks like ATL at -35%. on top of discounted spot BTC. paths to breaking open the piggy bank: SEC can approve ETF conversion, or Grayscale can wind down the trust themselves if they so choose.

— nic carter (@nic__carter) June 17, 2022

The SEC maintains that spot bitcoin ETFs are prone to underlying market manipulation.

Grayscale undeterred by SEC rejection

Despite consistent resistance from U.S. regulators, Grayscale launched its first European ETF in May 2022, which tracks the Bloomberg Grayscale Future of Finance Index, offering customers exposure to institutions at the crossroads of finance, technology, and cryptocurrencies.

Grayscale raised investors’ eyebrows recently when it announced that it had applied with the SEC to distribute 3 million ETHPoW tokens that were distributed to all Ethereum (ETH) holders after the controversial proof-of-work fork went live. 

At the time, Grayscale said it was seeking the rights to sell the tokens and pay out shareholders. 

Disclaimer

All the information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.

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Colorado is accepting crypto for tax payments — it could be a mess or a shining example

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Colorado is accepting crypto for tax payments —  it could be a mess or a shining example

Colorado is now accepting crypto for tax payments — but if you choose to use that option, it could change the amount you owe…
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BNB Chain confirms BSC halt due to ‘potential exploit’

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BNB Chain confirms BSC halt due to ‘potential exploit’

Rumors of a significant hack on the BNB Chain were confirmed by the blockchain’s team, with all deposits and withdrawals suspended on the network…
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