Since the integration of Ampleforth into the Publish0x platform, I was quite surprised to see a tonne of controversy surrounding its rebasing mechanism.
It seems to me that some people are quite confused about what Ampleforth provides and the direction that it is heading toward. A few questions that I have seen are;
When should I withdraw my AMPL from Publish0x?
What if it hits the negative rebase price and I start to lose money? Should I hold then or sell?
However, the most common question that I have seen is;
Why would anyone in their right mind hold AMPL during a run of negative rebases?
Luckily, I have spent the last couple of months getting my head around the entire Ampleforth ecosystem. I also had these exact same questions when I first found out about the project, so I am extremely happy to be able to help resolve some of these concerns;
Let me explain.
When a cryptocurrency is fresh on the market, it tends to be as volatile as hell. This is because of the low liquidity on the order books allowing for small-sized players to move the price up and down with relatively small trade sizes.
If you think back to its inception, Bitcoin started in a very similar fashion. People were quick at pointing fingers at the extremely volatile asset. They would say things like, why would you buy it if it dumps 80% every now and then? It's crazy.
Yet, here we are. A decade later, Bitcoin continues to remain strong - exceeding everybody’s expectations.
This is the parallel that I would like to draw upon. It's 2010 for algorithmic stablecoins like Ampleforth. A period that is very early and volatile.
The chart in the Tweet above is a great representation of what the market will need to go through before AMPL achieves its stability at its target price of $1.021 at the moment. AMPL aims to be worth exactly $1 in 2019 USD value - you can check the exact target price at any given moment here.
This will take a lot of time. Again, people will be quick to point their fingers, saying things like “Why would you buy it if it enters the negative rebase territory every now and then? It's crazy.”
Yet, we remember what they said about Bitcoin when they didn’t understand it. Ampleforth is no different.
Ampleforth managed to crack a hard nut when they figured out how to bootstrap an asset without requiring any collateral like the DAI ecosystem.
As mentioned by Twitter user @Rewkang, allowing early speculators to greater economic gains allows for the system to bootstrap itself - without the need for any outside intervention such as collateral.
All of the swings and rebases that we have seen so far will help to incentivize more volume to entire into the market. As a result, these swings will become increasingly less volatile in the long run as more players enter the market.
So, to answer the overarching question as to why would anyone buy and hold AMPL during the negative rebase?
The answer is quite simple. It is because they are the early traders that are able to buy the 1 USD pegged stablecoin at discounted prices - anything beneath $1 is a discount - hoping to make a profit when they catch the trend back to $1 (and beyond).
This is the main reason why AMPL does not turn into a death spiral of panic sales once it enters the negative rebasing threshold - because there are always traders looking to buy up bargains in the market.
$AMPL is not a stablecoin...or is it?
This can get quite complex to a certain degree. In a nutshell, the answer is yes and no.
The Ampleforth team officially states that AMPL is not yet a stable coin but it is pegged to 2019 USD value through a target price.
Looking at the price history of AMPL - It doesn't look so stable, right?
Well, here's what no one seems to be paying attention to.
As an experiment, I headed over to CoinMarketCap to check the historical data of AMPL. I ended up copying all of the following data into my own spreadsheet;
It goes down much further and I copied the entire history over. Next, I took an average of the closing price for the entire history of AMPL.
The highlighted result below might shock you as it did for me;
The average price for AMPL derived from the closing price of its entire history is $1.021!
Pretty damn stable for a not-so-stable stablecoin, right?
Moreover, $1.021 is exactly the price target that the rebase mechanism is trying to achieve;
Despite these swings that AMPL is currently experiencing in its infancy, over the long run the project has managed to hold onto its premise that it will target the $1.021 price target.