Tom Merritt shares the most important information to remember about stablecoin cryptocurrencies.
You may have heard of stablecoins and thought it was a good idea. After all, most cryptocurrencies are quite volatile, so why not have one that should be stable?
You may also have heard of stablecoins crashing and wondered: how did that happen? I thought they must be stable?
Here are five things to know about stablecoins:
- Stablecoins are often equated to US dollars. Many stablecoins are pegged to the US dollar in such a way that the issuer promises to always exchange one coin for one dollar.
- Stablecoins can be backed by many things – not just US dollars. Some stablecoins are pegged to other stable reserves such as gold. They may also be linked to an algorithm that manipulates the offer to hold it at a certain value.
- Stablecoins don’t need to be backed by anything. There is no regulation on what is called a stablecoin. The Terra stablecoin was backed by another cryptocurrency called Luna, which was pegged to reserves of many other cryptocurrencies. It was one that used an algorithm to maintain its value. That algorithm ultimately failed.
- Even dollar-backed stablecoins are not really dollar-backed. A stablecoin called Tether uses a mix of corporate debt, cash and Treasury bills. The idea is to have a number of holdings that can be liquidated quickly when needed, but that can also appreciate in value.
- Stablecoins are useful for money transfers. While Bitcoin can be relatively slow and Ethereum can have high fees, when stablecoins are truly stable, they can perform transfers much faster and cheaper than the traditional banking system.
Just because it has stable in the name doesn’t mean it’s completely stable. Warning emptor never applied so well.
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