Taming Volatility: Saga Aims to Fix the Boom and Bust Nature of Cryptocurrency

A group of leading economists are launching a new cryptocurrency by the name of Saga. Its aim: become the world’s first low-volatility cryptocurrency backed by actual reserves.

An Introduction to the Saga Foundation

The cryptocurrency market has witnessed tremendous growth over the past 15 months, but volatile price swings have made it less appealing for many in the financial establishment. Critics say a lack of certainty around coin valuations undermine the growth of digital currencies as viable methods of payment.

To address these concerns, an impressive list of economists and academics have come together to launch Saga, a reserve-backed cryptocurrency that aims to eliminate volatility. In doing so, it seeks to position itself as a more market-friendly bitcoin – and do so without the anonymity.

Saga will essentially operate as a stablecoin backed by a so-called “variable fraction reserve” that is pegged to the International Monetary Fund’s special drawing rights (SDR) basket. The SDR was created nearly five decades ago, with the Chinese yuan being its most recent entrant back in 2016.

Serving on the Saga investment board are an impressive group of people who have helped shape the global financial markets. They include Dan Galai, co-creator of the CBOE VIX Volatility Index, Jacob Frenkel, Chairman of JPMorgan Chase International, former CME Chairman Leo Melamed and Nobel Prize-winning economist Myron Scholes.

Frenkel, who also served as governor of the Bank of Israel, issued the following statement, according to the Financial Times:

“While blockchain technologies have gained growing acceptance, encryptic currencies have raised public policy concerns, since they are anonymous, unbacked, and are highly volatile. I share these concerns and see great value in Saga’s vision to address them properly.”

The Saga foundation has already raised $30 million from investors, but unlike other digital currency projects, will not pursue an initial coin offering (ICO) because the model doesn’t align with its vision of a low-volatility, low-speculation cryptocurrency.

Saga is under development in Israel with approximately 25 staff on board. By the end of the year, that number will nearly triple.

Volatility: Both Havoc and Reward

Volatility has been at the center of cryptocurrency since the very beginning. The crypto market adds and sheds tens of billions of dollars daily, with recent price wings proving even more volatile. While this has made many traders very rich, it has lowered the investment appeal of cryptos among traditional financial circles – as well as those with a weak stomach for dramatic price swings on a daily basis.

Proponents of traditional asset classes have suggested many ways for approaching – and taming – volatility. The launch of bitcoin futures in December was perhaps the biggest step toward weeding out volatility from crypto trades. While this may be the case for traders of the futures contracts, the bitcoin market as a whole remains extremely volatile.

That being said, some analysts have made a strong case that bitcoin’s intraday volatility has declined substantially since the early days of crypto trading. According to Chris Burniske, author of the influential ARK Invest whitepaper on crypto assets, bitcoin’s price volatility fell by half between 2011 and 2017.

The year 2018 may tell a different story entirely. According to Google Trends, searches for “volatility” reached a record peak in February. The search term achieved a Google Trends score of 100 in the week ended Feb. 10. That’s the highest score attainable. Interestingly, Feb. 10 was also the week of the epic crypto crash.

Searches for volatility have declined over the past seven weeks but remain high overall. Based on the Google Trends “related queries” information, searches for volatility have been strongly associated with the cryptocurrency market. At the time of writing, the top-three related queries all relate to Bitconnect, the now defunct cryptocurrency exchange that was accused of running an elaborate Ponzi Scheme. Numbers four and five on the list are “bitcoin volatility software” and “bitcoin volatility index.”

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi