Libra : insights into its expected stability

Titelangaben

Groß, Jonas ; Leon, Landes:
Libra : insights into its expected stability.
Bayreuth , 2019

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Abstract

Recently, stablecoins have gained high public attention. They provide a value-stable alternative to cryptocurrencies such as Bitcoin or Ethereum, which are volatile and, therefore, not suitable as means of payment. The announcement of the Libra project has further increased the public interest in stablecoins. In this paper, we study whether Libra might fulfill the function of money. We argue that Libra can only act as a proper unit of account and store of value if its value is relatively stable. To analyze the expected stability of Libra, we use the Special Drawing Rights as a proxy. For this purpose, we calculate common risk measures, namely, standard deviation, Value-at-Risk, and Maximum Drawdown. We show that Libra’s exchange rate against strong currencies in industrialized countries can be expected to be relatively stable in the long-term, however fluctuating in the short-term. In emerging and developing countries, Libra can offer protection against the devaluation of local currencies. However, holding Libra will also entail a higher risk of loss for residents of these countries. Furthermore, we find from current stablecoins, as Tether or TrueUSD, that Libra will not necessarily be traded at par with the underlying reserves any time. Reasons for this divergence can be a perceived risk of default and incentives to carry out hedging transactions.