Coinbase Global (COIN 5.68%) might be one of the most polarizing names in the crypto industry. After a much-hyped initial public offering (IPO) in 2021 saw the company valued at $85 billion after the first day of trading, Coinbase is now valued at a paltry $16 billion. Even Coinbase critics, however, must admit that the world's second-largest cryptocurrency exchange has been remarkably innovative in bringing new products to market.
And now Coinbase is working on an innovation it thinks could be the Holy Grail for crypto investors: a new coin that keeps pace with the rate of inflation. If Coinbase manages to pull this off, it could be a game-changer.
Cryptos and inflation
Traditionally, Bitcoin (BTC 0.94%) has been the crypto investors have turned to as a hedge against inflation. The total lifetime supply of Bitcoin is capped at 21 million coins, specifically to protect Bitcoin from the tendency of governments to print more money whenever they need to.
Dollars may become worthless, the thinking goes, but Bitcoin will retain its value much like gold. That narrative seemed to make sense until the 2022 crypto-market meltdown, in which nothing seemed to work as planned. Bitcoin was no longer the hedge against inflation it promised to be, and gold outperformed it.
While Bitcoin is becoming somewhat of a safe haven for crypto investors in 2023, it's by no means perfect, and there has always been demand for a cryptocurrency protected against inflation. Even billionaire investor Ray Dalio -- a Bitcoin bear -- acknowledged earlier this year that an "inflation-linked coin" would be genius.
Flatcoins
Enter the flatcoin. A flatcoin is similar to a stablecoin (which is typically pegged 1:1 to the U.S. dollar) but is pegged to the inflation rate instead. The idea is that each coin would be tied to the cost of living, so purchasing power would remain constant over time. If inflation were to rise, so would the value of this flatcoin.
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Imagine walking into a supermarket and being completely unfazed by the skyrocketing price of eggs or filling up your SUV at the gas pump and not caring that gas prices are soaring. Coinbase CEO Brian Armstrong has used hamburgers to explain the concept: "Every one coin buys you a McDonald's hamburger today, and hopefully, in five years, one coin will still buy you a McDonald's hamburger." In purchasing power terms, nothing has really changed if you are paying with a flatcoin.
Right now, the flatcoin is just a concept. However, on March 23, Coinbase put out a call to developers to start working on practical versions of these flatcoins. Given the current situation in global financial markets, Coinbase sees an opportunity to create exactly the type of flatcoin that investors concerned about inflation are demanding.
Can Coinbase pull this off?
While the development of a flatcoin will be challenging and will likely attract the attention of regulators and lawmakers, Coinbase has two big things in its favor. First, it is the co-creator of USD Coin (USDC -0.00%), one of the most popular stablecoins in the world. Right now, USD Coin has a total market cap of $32.7 billion. So Coinbase has enormous experience and expertise in creating similar types of crypto assets.
Second, Coinbase is uniquely positioned to develop this new flatcoin due to its recent launch of Base, a Layer 2 scaling solution for Ethereum. When Coinbase put out a call to developers for flatcoins, it did so via the Base blog, not the main Coinbase blog.
Thanks to a partnership with Optimism, this Base blockchain project can be optimized for decentralized finance (DeFi) and will be interoperable with Ethereum. So while it might seem that Coinbase is building a flatcoin from scratch, it is actually leveraging some of the existing blockchain infrastructure. Coinbase might be able to bring a flatcoin to market sooner than anyone expects.
Coinbase and the future of money
This is a fascinating time for anyone interested in the future of money. Central banks and sovereign governments around the world are calling for the launch of central bank digital currencies (CBDCs). Some nations are calling for the end of the petrodollar and an era of de-dollarization. And just about everyone can agree that the amount of money printed recently in the U.S. has been off the charts. In 2022, 80% of all dollars in circulation had been printed in the previous two years.
Thus, I really think there is demand and interest for a flatcoin. As long as inflation remains a threat, investors will continue to seek ways to protect their hard-earned money. While it's easy to pick on Coinbase these days, even cryptocurrency skeptics must acknowledge that a new flatcoin would be a game-changer. And Coinbase would become an even better long-term buy if it could pull this off.
