Volatility vs Stability
Bitcoin and other cryptocurrencies are highly volatile. Their value can go up and down by 5 – 10% or more in a short period of time (as short as a few hours).
This makes them not great as a form of payment for products and services — although I don’t mind accepting them (more on this below).
However, as a way to make money, volatility is not only good, it is very much welcome.
Note that if an asset isn’t volatile in that its price doesn’t change much, there really isn’t much profit to make when we trade them.
We would normally buy an asset at a low price and sell it at a higher price.
And so, the more volatile the asset, the higher its price can go, and the higher our profits will be.
Of course, the reverse is also true.
We can also lose more if we made a mistake with the timing of our purchase and the asset then goes down in value significantly before we could sell it.
However, there are also cryptocurrencies that are designed to be stable, in that their value remains fixed.
For example, USDT is a stable coin.
One USDT is always equivalent to One US Dollar.
In fact, Tether, the company that issues USDT tokens on the various blockchains, back each USDT it issues, with a physical US Dollar, or with an asset that has value that is equal or exceeding a US Dollar.
Thus Tether’s traditional bank account will hold hundreds of millions of US Dollars to give USDT tokens the “stability” that is useful for the purpose of using USDT as a form of payment.
I have mentioned this before. I accept both cryptocurenies like bitcoin and ether as well as stablecoins like USDT as payment for my products and services.
Because bitcoin and Ether will likely increase in value over time.
So I can sell them when they reach a higher price than when I was paid, and pocket profits I wouldn’t get if I accepted stablecoins.
I will earn these profits doing absolutely NOTHING other than accepting bitcoin or ether as payment.
On the other hand, I have certainty with stablecoins like USDT.
So if I’m accepting 1,000USDT now, I know its value will remain 1,000USDT a few hours from now, to a few years from now.
It is also useful if I need the money to pay some bills right now, so I will need to spend it.
But we all know that the US Dollar, which backs 1USDT, doesn’t retain a real value of 1USD over time.
Because of inflation, 1USD is 1USD now, but it may be worth only 0.90USD next year, and 0.80USD the year after.
So 1USD today will buy more things than 1USD next year, or 2 years from now.
So if I were to accept USDT that is backed by USD as payment for my product or services, I won’t get any appreciation in value like bitcoin and Ether.
In fact, USDT will CERTAINLY LOSE its real value as time passes by — even though it represents the USD, because of inflation as mentioned above.
So take your pick.
You can either:
- Accept cryptocurrencies that have good potential to appreciate over time; or
- Accept stablecoins that will absolutely lose their value over time.
Both have their places, and so I accept both.
However, if you want to maximise the value of your USDT,, you MAY want to do the following (this is not financial advice, just an option for you to consider as part of your financial education):
1. Put some aside for emergencies
- You need certainty so that you know exactly how much USDT you have.
- You can’t have an emergency fund that fluctuates in value from day to day because you may not have enough for when you need to use it.
2. Use some of your balance USDT as follows:
1) Pay your bills or buy stuff you need or want, RIGHT NOW
- Your USDT will be worth less next year, so you will need more of it if you get it next year.
2) Swap your USDT for bitcoin or Ether
- Because both have the potential to appreciate in value over time.
- If you have to choose one, choose bitcoin because bitcoin has a fixed supply cap of only 21 million that will ever be issued.
- Ether has no supply cap, although it does have a fixed number that will be issued per year. If demand for Ether exceeds its supply, Ether’s price can go up even though it doesn’t have a fixed supply cap like bitcoin.