Welcome to Digital Wager Wire, where we delve into the evolving landscape of cryptocurrencies, which is especially relevant if you’re looking to bet with cryptocurrencies. In this installment, we tackle the question: what is a stablecoin?
A stablecoin is a cryptocurrency with a pegged value, anchoring itself to commodities or currencies like gold, silver, or the dollar. Positioned as a lower-risk alternative, these coins aim to mitigate the volatility experienced by more established cryptocurrencies like Bitcoin.
As they gain traction, regulatory bodies, including the International Organization of Securities Commissions (IOSCO), are starting to scrutinize their impact on the broader financial system. Join us as we explore the types and significance of stablecoins in the ever-changing crypto market.
What Is a Stablecoin?
The definition of “stablecoin” is a cryptocurrency with a pegged value. The peg intends to tie it to a commodity or another currency that works as an external reference. The pegged value of the stablecoin is set against the regular financial commodities of gold, silver, or the dollar.
Stablecoins are still relatively new to crypto and financial markets, so this is a period when the “stablecoin” is building trust. The popularity is steadily on the rise which suggests things are progressing well, but it is always important investors stay well-informed.
Lower Risk, Less Volatile Alternative
The crash and prolonged downturns of Bitcoin in the last couple of years have reminded investors and traders that the crypto market can go the other way rather than the easy profits of the currency during the early years. This has opened the door for a lesser-risk type of investment for users, and stablecoins are seen as a potential way to fill that void.
What Makes Stablecoins Important?
Bitcoin as we all know is the most popular cryptocurrency but as we’ve seen in recent years, its volatility shows the biggest of swings. To example this, if we look back to the start of 2020 when the world was struggling with the Covid-19 pandemic and the value of Bitcoin was just short of $5,000. Just over a year later, Bitcoin’s value has risen to an extraordinary level of over $60,000 for the most remarkable ROI (return of investment) of 1100%. Then two months later by the middle of 2021 the market had slumped hugely by 50%.
While that volatility is great for traders and shrewd investors, it’s a nightmare for buyers and sellers of items when purchases can result in huge losses for either party. For the long-term acceptance of cryptocurrency, stablecoin needs to become fundamental and importantly enhance acceptance in the everyday financial world.
What Are the Different Types of Stablecoins?
- Fiat stablecoin – Fiat stablecoins are collateralized to maintain a reserve of fiat currencies such as the U.S. Dollar bringing the sense of collateral along with precious metals (gold or silver) or natural commodities like oil.
- Crypto stablecoin – These are collateralized and backed by other cryptocurrencies. These stablecoins are over-collateralized with the intention of reducing risk. For example, Ethereum (ETH) backed (DAI) which is pegged to the U.S. dollar to insure against downswings over 50% of the original value.
- Algorithm stablecoin – Algorithm stablecoins have no reserve value; their purpose is to control the supply through a pre-set Algorithm
Regulators Are Starting to Scrutinize
The rising popularity of stablecoins is due to the rapid growth in value of the market to $130 Billion and the natural knock-on to the broader financial system.
For example the accepted importance of stablecoins in the financial eco-structure of the world, the IOSCO (International Organization of Securities Commissions) said,
“Stablecoins should be regulated as financial market infrastructure alongside payment systems and clearinghouses”.
The proposal dictates that stablecoins are to be deemed systemically important by regulators because crypto has the potential to disrupt payment and settlement transactions too much for buyers and sellers.
Final Thoughts
In summary, here at Digital Wager Wire, we can tell you the long-term purpose and most important function of stablecoins is an aim to provide a more solid alternative to the higher volatility market associated with the more popular altcoins.
The ethos behind “stablecoin” is a pegged value bringing buyers and sellers alike a level of protection from the natural volatility that has surrounded cryptocurrency.
This would naturally give cryptocurrency a stronger foundation in the regular financial world where they need to become a more acceptable commodity for buying and selling.
We need to keep the perspective that “stablecoin” is still a relatively new concept. This means we are still in a time where the new form of cryptocurrency is building trust across all financial sectors.
Overall, we learned that a knock-on from building trust in crypto is that it will garner more trust from traditional financial institutions.
