News

Stablecoins, Bitcoin’s wild volatility, and how the crypto market works


Tags:

There’s something funny happening with cryptocurrencies right now, and if you have any interest in combining music with crypto technology (like dropping an NFT, for instance), read on. Actually – this isn’t news, as such: there’s *always* something funny happening in the world of crypto – which is the reason you need to understand it, if only a little bit.

You’ll have noted that the value of Bitcoin – and thus all other cryptocurrencies of note – have dropped significantly recently and that NFT activity and hype has dipped too. In fact, between writing and editing this article, the price of Bitcoin dropped a further 10% and then went up again by 11%. That’s not just volatility, it’s bananas.

Knowing how the crypto world works – or being aware that you don’t understand it very well – is important if you are considering investing time, money and your artist’s reputation into it.

We’ve written a lot about things that live on various crypto frameworks – things like NFTs, that can make artists a lot of money very fast, or more slowly, by creating meaningful long-term relationships with fans. And we’ve written about technologies that promise to revolutionise how artists raise and share money, like Ditto’s fascinating Opulous “Decentralised Finance” (DeFi) platform.

But we haven’t spent too long writing about the mysterious and anonymous forces that swish around under the surface of all this, in the depths of the system.

Here’s why we are now, and why you should care. The wobbly crypto prices – led by the price of Bitcoin – aren’t just the frothy ebb and flow of an ephemeral market: they are very specifically and directly tied to the real world value of anything “crypto” that you own or are involved in, including the platforms you use. We’ve rounded up the views of some cryptocurrency sceptics to help provide you with a wider view.

The importance of stablecoins

If NFTs are a bunch of colourful pleasure boats bobbing about near the shoreline, the frantic buy-and-sell of cryptocurrency activity is the deep, dark waters beneath. And down there, it’s confusing – and sometimes a little worrying.

There’s another, enormous force at play in crypto that you may not have heard about – they’re called “stablecoins”. These are cryptocurrencies whose value is pegged to, say, the price of a dollar: 1 stablecoin = $1. It means that, for every stablecoin in existence, there should be a real-world dollar somewhere (or something worth a dollar, like an investment), waiting to be exchanged for it. One, called Tether, is a huge, powerful coin, and you can buy and sell it like anything else.

This sounds good – real-world money is brought into the crypto market with lower risk, because its value is always in line with real-world money. This would be good for artists and labels who are enthusiastic about building things like NFTs into their artist’s income portfolio.

(Don’t forget that, in the future, NFTs are almost certainly not going to be about selling wildly expensive gifs: they’re going to be cheap, accessible, fan-friendly digital items that are used to show fandom all over the digital ecosystem.)

But stablecoins are not that simple. Some people, like the analyst (and sceptic) Frances Coppola, say that Tether is “effectively unbacked” by cash. She thinks there is not a real-world dollar for every stablecoin in the system – and equally sceptical data scientist / economist Matt Ranger has an even – let’s say – stronger opinion on the nature of stablecoins.

Both Ranger and crypto-finance journalist Amy Castor claim that stablecoins are “propping up” the value of Bitcoin. How? Well – sigh – it’s complex, but stablecoin operators regularly “print” new currency, in the billions. Because each stablecoin should have the value of one dollar, real-world value thus flows into the crypto exchanges. That’s where people like you and me buy Bitcoins or Ether from, when we need Ether to mint an NFT; or when we want to buy one. The more value that flows into exchanges, the higher the price of those currencies.

And here’s a possible rub: blockchain news and analysis website Coingeek says that “the value of BTC is entirely dependent upon the printing” of stablecoins. Some ultra-sceptics claim that when stablecoins print money, the price of Bitcoin goes up, and when they stops printing, the price goes down.

In this reading, the high prices of all those NFTs earlier this year weren’t only about the intrinsic value of the art; they were also about something else – making real-world money by moving crypto-money around.

What about NFTs and DeFi?

NFTs are often viewed as exciting, valuable opportunities for artists. DeFi is touted as the revolutionary technology that will allow artists to raise money on their terms. And they are both of these things!

But they are also complicated and involve some risk, especially if you are drawn into the get-rich-quick side of the conversation. Because the value of most cryptocurrencies follow Bitcoin, it means the price of Ether – the coin that fuels most NFT transactions – is lifted when Bitcoin rises, and dips when it dips. A high Ether price means that buying an NFT costs more. And any sudden, repeated volatility means repeated shocks to both the system, the value of those NFTs – and users’ confidence in it.

These, remember, are the views of sceptics: Castor calls NFTs “worthless” (Ranger calls Bitcoin “useless”, which is a subtle but important difference) and that NFTs are “a new avenue to bring fiat money into the world of crypto and to pump up [crypto grifters’] bags.”

Ranger, who is also an ex-pro poker player, says that “BTC provides no economic value except speculating more on crypto.” He says that DeFi “is only used to leverage crypto speculation.” Castor again, on NFTs: “The problem is, all bubbles eventually pop, and when this one does, retailers will be left holding the bag”.

So, in this extreme world view, who could be left with “the bag” in the music industry? That would be the fans who bought NFTs and maybe even the artists who made them.

And yet these technologies really do promise to deliver some important changes to the music business.

So what does it mean for artists and the music business?

Note that Peak NFT Hype was at the same time as when Bitcoin was at its dizzyingly highest value. So people who bought Ether in order to buy an NFT were buying both at a high price.

From the sceptics’ perspective, fans who have bought NFTs – and the artists who made them – would be the ones left with “the bag”. The NFT (in the fans’ case) or the Ether (the artists) – could both be subsequently worth much less than when the transaction initially happened.

On the other hand, because NFTs have another value – artistic value – their price may steadily increase over time, just like first pressings of Beatles records or limited edition merch.

One thing to consider is that while artists may not lose out financially, they could instead lose in terms of fan trust. In a reply to the noted NFT visual artist Sterling Crispin, Ranger was withering: “There’s a decent chance you’re simply fleecing your fans by selling them worthless tokens.”

How would your fans feel if their NFT was worth much less than when they bought it? Some may not care, because they simply love the art they bought: the value is not financial to them. Others bought it as an investment in the artist and are happy to wait for it to increase. Others might feel like they have lost out.

Risk versus reward; value versus “value”

Positive hype about crypto in general is, let’s say, readily available: here is some on Twitter. Some of it is thoughtful, most is just hype. The reason we have rounded up these counter-perspectives is because they are harder to find.

Here’s the highly sceptical takeaway, the not-so-sceptical takeaway, and, finally, our calmer view.

The highly sceptical view is that we, the fans and the artists, were being played. The wild hype around crypto, NFTs and Bitcoin pulls in people who don’t really know what’s happening deep inside the system, and they invest real-world money in things that we think will increase in value. That real world money then flows to the few who understand how the system works, and everyone else is left with something worth less – in a financial sense – than they paid for it.

But remember, “value” here is subjective, and will change over time: if the crypto/NFT/DeFi ecosystem takes off, we can all happily buy into our favourite artist’s career and the subsequent profit could be either financial, or in the happiness in knowing you have supported them, or both.

Great technology, and a great place to lose your shirt

So whats’s the truth? Well, it’s all true to an extent – the crypto world is a great place to be convinced that you’re investing into riches when you’re actually losing your shirt; but it’s also the place where a new, exciting platform layer is being built that may provide something close to the panacea that the hype suggests.

It’s important to be honest with yourself about the nature of cryptocurrencies, and then to be honest about how you feel about that. The price and associated frenzied activity of Cryptocurrencies – which, remember underpin most of these exciting new technologies – is by its nature, cyclical. There will be frenzied highs and accompanying hype; and frenzied lows and accompanying cynicism.

If you get drawn in by the temptation of fast riches, promises of techno-solutionism to all your problems, or warnings that you’ll miss the boat, be aware that there are people who know how to use the system much better than you – and that the system itself moves in ways beyond your reach.

A gentler recommendation – as per the view of music-crypto experts we spoke to in March – is that the technology is exciting and powerful, but new and with risk. Be curious and interested, but be very careful – and be prepared for the possibility that you could lose out due to things you don’t understand or control.

Photo by André François McKenzie on Unsplash

Joe Sparrow

Sign up for Music Ally’s free weekly newsletter, The Knowledge – at-a-glance analysis of the modern music industry

Read More: News
Leave a Reply

(All fields required)