From CoinShares Research Blog by Matthew Kimmell

The Fundamental Value Differences between Stablecoins and Bitcoin

As mentioned in part one, some of the property advantages of crypto dollars compared to US Dollars in traditional banking systems come from using public settlement networks and personal wallet software. These same advantages apply to (and originated with) bitcoin, namely global access, individual custody, and 24/7 direct transfers.

However, unlike stablecoins, bitcoin is not a cryptographic representation of an existing asset held elsewhere. There is no “redeem” mechanism for bitcoin. Instead it is a fully digital asset, existing within its own accompanying settlement system.

Within its system, bitcoin functions as the internal unit of account that can be transferred to other network users, but the units have no existence or use on the outside. It is the system’s rules (the protocol) enforced by users running its software (the network) that determine bitcoin’s (the asset) monetary properties.

And this is why the investment prospects of crypto dollars and bitcoin are fundamentally different.

While crypto dollars can rid US Dollars of the limitations of private banking networks, their prospective value still relies heavily on the decisions of the US Federal Reserve and Treasury, and over the long term, that value will, by mandate, only go down.

Alternatively, bitcoin’s fixed monetary properties rely on its software ruleset, which outlines how it’s issued, sent, received, etc. The existence and permanence of these rules are what makes bitcoin the first digital yet perfectly scarce monetary good.

A = Best F = Worst;Properties in white are fixed and yellow are variable, changing based on monetary usage;Source: CoinShares

So while bitcoin and stablecoins share many of the benefits that come from leveraging more advanced payment rails, there are still many differences between the two. Bitcoin is more scarce, private, and freely spendable. However, as stablecoins inherit the broader market dynamics of US Dollars, bitcoin is also less liquid and more volatile. On a level playing field, it is these tradeoffs that individuals consider when evaluating which, or how much of each, to hold.

The Stablecoin Gateway Depends on bitcoin’s ability to compete with US Dollars

The fundamental investment case for bitcoin boils down to its ability to compete with other forms of money. Likewise, the potential impact of the stablecoin gateway will depend on bitcoin’s ability to compete with US Dollars, in addition to the general market size of stablecoins.

The promise of this pathway is that stablecoin owners have less educational hurdles compared to other non bitcoin owners, and many are likely already speculating on which forms of money are the best to hold.

Additionally, crypto exchanges and multi-asset crypto wallets often offer a user experience that directly juxtaposes stablecoins, bitcoin, and local currency, putting them in close competition with one another and making users keenly aware of how much of each they hold over time. It is analogous to having a new age FX account, the experience of which should improve with better wallet software and user interfaces.

This type of user experience offers controlled testing of users’ monetary preferences and behaviour. At last, Gresham’s law can be observed with open permission and access to monetary goods in digitised form. If the principle holds, it would not surprise us to see more stablecoins and local currency usage as transactional money, and bitcoin as a savings money.

The Potential Impact of the Stablecoin to Bitcoin Adoption Gateway is Immense

The investment opportunity of bitcoin lies in the fact that its knowledge is not yet evenly distributed, and stablecoins are a mechanism to assist in that spread of knowledge.

We see this as an increasingly relevant opportunity for greater bitcoin adoption. The global demand for dollars has created a hotbed for crypto dollar usage, and we don’t see this trend stopping anytime soon. If cases of crypto dollarisation become more popular, either officially or unofficially, it is possible we even see an acceleration of this trend.

In our opinion, bitcoin adoption is not a matter of if, rather a matter of how, why, who and when. We speculate that a stablecoin experience lowers the barriers of both discovering and accessing bitcoin, as well as reduces its material learning curve. Such a stablecoin experience, either on a centralised exchange, personal wallet, or at a local bank, likely also closely displays bitcoin with stables and other available monetary instruments. By placing it in direct opposition to competing alternatives, Bitcoin is neatly provided the opportunity to capture new audiences.

We believe approximately 270 million people own bitcoin today (only about 3% of the global population), with over 70% living in Emerging and Frontier market countries. We also believe bitcoin is extensively used as a tool of savings and speculation, primarily outside of developed economies, but also to a certain extent within.

We anticipate that over the next decade or so, bitcoin’s largest adoption will continue in similar jurisdictions and for similar reasoning. As the global population is skewed to these regions, and monetary stability is often lacking, bitcoin’s opportunity is objectively large, yet also uncertain and unpredictable. We are encouraged by stablecoins possibly being the entry point that expedites the spread of crypto knowledge in these regions, and, due to its superior long-term store of value properties, we believe bitcoin will meaningfully succeed against its competition.