Notes 7/28: Bitcoin Price, Tether and Bitcoin, and Palau Stablecoin

Bitcoin price continues to remain equable in its chosen range of between $29,000 to $30,000. Right now, the cryptocurrency is changing hands for $29,243.94, unchanged from its price a day ago.

The world’s biggest cryptocurrency by market capitalization shrugged off positive data about an increase in US Gross Domestic Product (GDP) – news that should have boosted its price because it reduces the odds of a future interest rate hike.

Liquidity Problems

What is bitcoin’s future price? It is hard to say because this is crypto – the most transparent and accurate ecosystem in existence.

Therefore, we have two firms looking at the same blockchain and coming up with different conclusions. Blockchain analytics firm Glassnode claims that bitcoin whales, those with substantial holdings of the cryptocurrency, are moving their coins to exchanges to sell them. Another analytics firm CryptoQuant, however, says the same whales are hoarding their coins.

Either way, one thing is certain: bitcoin’s ecosystem has very low liquidity right now. The cryptocurrency’s range-bound peregrinations will end when buyers have completely exited its ecosystem. Then it might be time for another low or a crash.

Tether’s Bitcoin Reserves

In the absence of external catalysts, a major contender to instigate that event is Tether. In May, the stablecoin had said it would buy bitcoin for its reserves using profits, amounting to $1.5 billion, from its operations. That means its purchases can provide sufficient support to bitcoin price. Tether’s purchases are a service to its algorithmic twin because they make up for lost liquidity.

But they also multiply risk for Tether. With more bitcoin in its portfolio or reserves, the stablecoin’s peg becomes wobbly because it is exposed to bitcoin’s price volatility.

The stablecoin will also find it difficult to engage an auditor to reassure investors.

Auditing firms were put on notice today by the Securities and Exchange Commission (SEC) chief accountant Paul Munter. He stated that accounting firms would be censured or suspended in they engaged in assurance work for crypto.

Tether has already lost its peg many times in the past, most recently at Binance.US. Another depegging event could be catastrophic for bitcoin and its price.

Palau National Stablecoin Pilot

Away from manufactured news in crypto, there are interesting developments. Palau, a group of islands in the Pacific Ocean, has begun a pilot to test a national stablecoin using a private version of the XRP Ledger – a platform developed by Ripple. The stablecoin will be called Kluk and initially distributed to 200 government employees. Only select retail establishments and government organizations will accept Kluk.

Palau is a dollarized country, meaning it uses the U.S. dollar as its currency. As such, Kluk will be pegged to the U.S. dollar and its circulating supply collateralized at a U.S. bank outside the country. The country’s economy is cash-based; therefore, the use of a national stablecoin will automate and expedite transactions.

XRP Ledger Questions

There have been many pilots for central bank digital currencies (CBDCs) in the past. For example, Marshall Islands announced a pilot not too long ago. The National Bank of Kazakhstan is also supposed to be testing out a CBDC on Binance’s BNB Chain.

But the results of these experiments are not always made public; therefore, it is difficult to know the learnings from such pilots or whether they represent significant advances in rethinking the role of central bank issued currencies.

The choice of XRP Ledger to implement Palau’s stablecoin is interesting. Ripple announced its CBDC platform earlier this year. The platform is meant to manage the entire life cycle of a CBDC, from minting through to distribution and burning or removing them from circulation. The market for its platform is still unclear since monetary sovereignty is an important component of CBDC implementation. Will governments rely on a third-party solution to handle their economic affairs?

While the scope of Palau’s pilot is small currently, it is not clear whether the ledger can scale to adequate levels for large populations. Ripple’s website states that the load on an XRP ledger varies based on transaction volume, total size of data, and API calls.

One thing is for certain amidst these uncertainties. XRP, Ripple’s native token which is used as a liquidity tool used in the platform, will not benefit because the ledger supports the use of fiat currencies.

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