From an investor’s point of view, volatility of an asset is a major concern. Same is the case for crypto assets where popular cryptocurrencies like Bitcoin (BTC) show more volatility but on the other hand, stablecoins function differently, according to news.
As we know, more than a year ago in December 2017, the flagship digital currency Bitcoin was being traded at over $20,000 until its price got devalued a couple of months later, trading at $6,000. Since then, the price of the cryptocurrency has been going downhill and on its good days, increases at the rate of only a few percentages. This volatility in bitcoin’s prices gives rise to a question mark in the minds of the investors, who expect a little more from their investments. So is stablecoins the solution for this growing problem which may be trading at lesser value but show less volatility than other types of cryptocurrencies?
Stablecoins are cryptocurrencies designed to minimize the effects of price volatility and to minimize volatility, the value of a stablecoin can be pegged to a currency, or to exchange traded commodities (ETCs). These are the type of digital assets which are expected to maintain their value in the financial market i.e. to show lesser volatility, giving more confidence to investors. A prime example in this case would be Tether (USDT) which has been present in the crypto industry for quite some time now but has always traded at around $1.
While the idea of maintaining the value of an asset seems very attractive, the question that pops into our heads is that how do these crypto assets manage to trade at similar prices? The answer to that is quite simple actually because some stablecoins are pegged to other assets, such as the US dollar and the value of these assets are backed by the issuers which automatically protects the value of the crypto assets pegged to the asset. Other stablecoins are pegged to other digital assets which helps organize the supply of these assets with the demand. These mechanisms assist in keeping the prices of stablecoins intact.
Currently, the total number of stablecoins in the crypto industry estimates around 57 in total out of which 23 of the stablecoins have been launched and are running in the market, while the remaining 34 stablecoins are still in the planning stage. A research shows that the value of the stablecoin market at the beginning of this year stands at almost $3 billion which clearly shows that this type of crypto assets is doing well in the industry. Moreover, Tether’s officials claim that when one Tether sells, $1 is deposited in the bank in exchange for it.
Stablecoins can prove to be really useful between cryptocurrencies and traditional finance since they act as a safe gateway for investors when the fear of a market downturn arises due to their ability to harvest the gains from crypto assets’ trading. When the banks do not accept transfers of funds from certain crypto assets, the stablecoins are beneficial which help transferring funds across different crypto exchanges which do accept stablecoins for example, Tether.
Another concern regarding the stablecoins is their ability to make profits which is done through the charge of fees from deposits and withdrawals of fiat currency, so on every deposit or withdrawal of cash, the stablecoins earn profits from charging a certain amount of fee. Also, it was reported that stablecoins like Tether are making loads of money from interest and the digital asset earned over $6.6 million since the start of last year from interest. Hence, it is safe to say that the stablecoins have their own resources to make profitable gains.
Where stablecoins show so many positive signs in their operations, there a few risks associated with this type of digital currency too. The stablecoins pegged with other digital assets have the risk of crashing if the digital asset crashes and the stablecoins pegged with currencies run the risk of fraud rising from manipulation or any other illicit activity. Stablecoins must follow certain jurisdictions or else they have the fear of being excluded from the markets.
Therefore, considering the volatility of crypto assets such as bitcoin, stablecoins could be an answer for lesser volatility seeing its progress in the financial market and the gains associated with it. Investors might consider investing in stablecoins based on its ability to maintain its value.