Stablecoins: The Poker Chips Of Cryptocurrency

Cryptocurrencies are highly fluctuating currencies. From BTC to DOGE, these virtual currencies do not operate the same way traditional financial instruments do because their volatile nature causes them to attract more and more investors (Official trading platform) . These digital tokens are extremely unpredictable; you can become a millionaire overnight, and you can also lose everything at the same time. To cope with this problem, a cryptocurrency is developed to maintain stability and whose value does not fluctuate, called the Stablecoins.

Stablecoins serve as an intermediary party to fill the loopholes between fiat money & digital money. It is so because they are the virtual assets that are stable and operate like the fiat currency but contain the movement and utilization of the cryptocurrencies. Stablecoins are the best possible solution to the volatility of the crypto market as these coins come up with built-in price stability. Stablecoins can be classified into four types that are fiat-backed Stablecoins, commodity-backed Stablecoins, crypto-backed Stablecoins, and algorithmic Stablecoins.

Stablecoins

Stablecoins are the cryptocurrencies that are bundled with fiat money such as Euros or US dollars or products like gold, oil reserves, etc. Getting the support of other assets, the risk of dynamic changes in the value of Stablecoins disappears. For instance, the Stablecoin Pax Gold is buckled with the prices of gold, and TerraUSD is pegged to the US dollar.

Uses Of Stablecoins

1. Stable coins are being utilized by investors to safeguard their investments from sudden fluctuations of digital currencies. So, you can consider Stablecoin a tokenized version of fiat money or a fixed-value digital asset.
2. These coins also assist in creating ease for the trading activities being performed on various exchanges. Stablecoins enable the investors to directly buy cryptocurrencies like Bitcoin, which is tradable via Bitcoin Trading Software or Ethereum by offering Stablecoins to the 2nd party instead of fiat currency.
3. DeFi platforms are utilizing Stablecoins for granting cryptocurrency loans to their users. It is because the value of a collateralized currency like Stablecoin will not swing rapidly during the loan if the customer gets approved and transferred into his digital wallet.
4. Crypto experts might use Stablecoins for multiple purposes like lending and staking, while the beginners often utilize them to make the transaction fees minimal as there exist exchanges that do not charge you if you are exchanging $US against the Stablecoins.

How Do Stablecoins Work?

Like any other asset class that is becoming prominent, digital currencies are sensitive to the market forces too. In line with this, multiple crypto initiatives are constantly looking for the techniques to minimize the risks and strengthen contribution to the widespread ecosystem of cryptocurrencies. The latest results go far beyond traditional market buying & selling. 

Consequently, assets are coming up with the features of built-in price stability. Hence, Stablecoins are developed as a brand new subdivision of the crypto market. The purpose of these coins is to work with consistency, as the name indicates.

Are Stablecoins Really Stable?

The creators of crypto have advertised Stablecoins as secure and anticipated currency, but according to the crypto investors, it is not true because the circumstances may vary. Although it is denominated in US dollars, due to the crypto crash, many of the Stablecoins TerraUSD, LUNA and Tether faced a decline in their prices. 

Even some investors became extremely angry and decided to go to the court of law against Coinbase – a platform offering Stablecoins.

What Is The Reason Behind The Downfall Of Stablecoins?

Immediately after the Federal Reserve increased the interest rate by 0.5 percent, the Stablecoins became prey to a major sell-off of cryptocurrencies. An increase in the general prices of commodities, a rise in the interest rates, and supply chain concerns have frightened the investors that shortly, the economy of the United States will face a severe depression.

This economic uncertainty is leading people to withdraw their investments from the risky assets and transfer them to the risk-free assets to make their hard-earned income secure. That is why cryptocurrencies, including Stablecoins, are facing a downfall. As per the CoinMarketCap Data, the value of the majority of cryptocurrencies declined severely, ranging from 5 percent to 85 percent.