The United Stablecoins

Welcome back to Efficient Frontier’s biweekly newsletter! We hope you enjoy our update on the Federal Reserve’s “Stablecoin mania” and our birds-eye Bitcoin market wrap

Why is this story important despite not being as big as NFTs or as cutting edge as DeFi?

1. CBDCs and other digital fiat will have an essential role in how the cryptocurrency universe will tie into the fiat world

2. The rise of a strongly centralized CBDC (Central Bank Digital Currency) for one of the major fiat currencies may be a massive competitor to Bitcoin and other open systems, as we’ve seen in China — where the government clamped down on Bitcoin leading up to the expected premiering of the digital RMB.

According to the Fed’s new report on CBDC’s it does not intend to create a centrally controlled dollar anytime soon, writing they will not “proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorising law” and only with “broad public and cross-governmental support”.

The report was low on details and serves mostly as an invitation to a discussion, though it mentioned that “well-designed and appropriately regulated stablecoins could potentially support faster, more efficient, and more inclusive payment” and that “these forms of non-bank money could cause a shift in deposits away from banks even without a CBDC”.

In contrast, the report by the Federal Reserve on stablecoins published last week goes into much greater detail and sets an informative ground to the hearing on the subject next Tuesday.

Another interesting direction hinted at by both documents is that the American CBDC will serve only banks, while regulated stablecoins will be provided by in the second tier to the bank to the customers.

On January 28th we wrote “sentiment doesn’t have much lower to go” — this time we got it right and since then, Bitcoin’s price grew mostly at a steady pace from $37,000 to a high of $45,300. There were also two highly volatile days: February 2nd which saw a $2,000 drop, and February 3rd with a $4,000 rise to $41,780.

Right now the price of Bitcoin is $42,520 and sentiment, according to Alternativ’s Bitcoins fear & greed index, has recovered to 50/100.

Binance, which is dominating the Bitcoin derivatives market with 30% of all open interest, currently is reporting that traders are ever so slightly more long than short. This follows two weeks where the majority of Binance traders were betting on the short side — a rare occasion.

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