Will stable currency be a good way to avoid the risk of weak legal currency?

This article comes fromMedium, Odaily translator | Moni

This article comes from

, Odaily translator | Moni

It is undeniable that for some countries with weak legal currencies, local residents may prefer to choose stablecoins, because it is easier to circulate in mobile applications and decentralized exchanges, and some companies even use stablecoins to hedge against high local currencies. Volatility Risk.

Next, Mr. Odaily (WeChat: o-daily) will take a look with you to see what causes this situation to happen.

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The basics of strong and weak currencies

When a currency decreases in value relative to other currencies over time, it becomes weak and shows weakness in the currency market. The emergence of a weak currency is usually accompanied by some common market characteristics, such as inflation, current account deficits, or the level of imports is much higher than the level of exports.

Furthermore, other reasons for currency weakness can also be attributed to country-specific variables, such as poor governance, and of course depending on how the currency trades against other currencies and commodities.

When determining the strength of a currency, there are three most important factors that need to be considered: interest rates, economic policy, and stability.

1. High interest rates are more attractive to investors and will also increase the strength of the currency itself.

2. The implementation of strict fiscal discipline and economic policies to curb inflation can also strengthen the currency.

Stability may be more important than the overall strength of a currency. Because a strong currency will make export costs higher, relatively, a weak currency will make import costs higher, so ensuring low volatility and maintaining currency stability is the key.

If a country's economy is doing really badly, usually its currency will drop in value, but that's not always the case. Sometimes a country's currency appears to be strong, possibly because they have implemented control measures during the inflation process.

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Strong and Weak Currencies Ranking

The five weakest currencies were: Iranian rial, Vietnamese dong, Indonesian rupiah, Guinean franc and Lao kip.

After reading this, I believe that many community members have the same doubts as Mr. Odaily (WeChat: o-daily): Isn’t Venezuela’s sovereign bolivar currency the weakest currency? In fact, the Venezuelan sovereign bolivar is no longer in the top 10 weakest currencies in the world because of their previous rebalancing — a measure often used by governments to combat hyperinflation.

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A closer look at weaker fiat currencies

Of course, the ranking of currencies will not remain unchanged, so if you think about currencies from the perspective of "cryptocurrency", you should look at which currencies are more likely to be attacked when evaluating the strength.

Well-known U.S. financial blog Zerohedge reported last year that Societe Generale (SocGen) had developed a “gross and net vulnerability” scorecard designed to assess which currency is most at risk over a period of time to come. In this evaluation model, taking into account factors such as fiscal deficit, short-term capital flow, short-term foreign debt, foreign exchange-denominated bonds, overseas bond ownership, and reserve adequacy ratio, the five most vulnerable legal currencies in the world are finally evaluated as:

1. Turkish Lira

2. South African Rand

3. Malaysian Ringgit

4. Indian Rupee

5. Indonesian rupiah

For example, during the five-month period from August 2015 to January 2016, global risk assets experienced a sharp sell-off. At that time, except for the Japanese yen, which rose by 6.6%, other major currencies and markets fell sharply. For example, the euro fell by 1.2%, the Swiss franc fell by 2%, the British pound fell by 9%, and the ruble fell by 22.6%.

But it is worth noting that the best performing currency in the world during this five-month period turned out to be Bitcoin, whose price rose from $284 in August 2015 to $378 in January 2016, a staggering 33% increase. So people also ask a question:

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Can cryptocurrencies function when currencies are weak? What good can they bring?

One way in which Bitcoin and other cryptocurrencies such as stablecoins connect with traditional financial markets is that they can be "candidates" for people to diversify their investment portfolios. Put simply, people think of cryptocurrencies as an asset that is “uncorrelated” to traditional currencies, and therefore can be included as a recession-proof option if they are included in one’s portfolio.

The recent announcement by Fidelity Investments to include cryptocurrencies as an investment option for its clients is evidence of the growing popularity of the “cryptocurrency as a hedge” argument. However, there is another type of cryptocurrency that can be used to mitigate the negative effects of weaker currencies – and it is stablecoins.

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Stablecoins are another way out

At this stage, the use of stablecoins as a means of mitigating the risk of weak currencies does not appear to have received mainstream media attention.

If you want to use stablecoins to avoid the risk of holding weak currencies, there is actually an easy way: first, you can use cash to buy bitcoins in some cash trading networks, and then convert them into stablecoins based on other local currencies. Bitcoin, or a cryptocurrency with store-of-value properties like Bitcoin.

As an example, if you currently hold Philippine Pesos (PHP), simply convert your cash to stable.PHP, and then trade to BitUSD.