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CRYPTOCURRENCY

Stablecoins: The bridge between crypto and fiat

October 21, 2021
2 mins

Cryptocurrency can be confusing, even to the veterans, but especially if you’re just getting started. There’s a lot of technology, new terms and overall novelty to this emerging asset class, so it’s very easy to overlook some of the most important parts of it.

Depending on how deep you are into the crypto sphere, you may not have even heard the term ‘stablecoin.' It’s an easily overlooked aspect of the crypto world, but it plays an important role nevertheless.

What are they?

  • Stablecoins are cryptocurrencies run on blockchains apparently tied to the value of "stable" reserve currencies, usually the US dollar, or exchange-traded commodities like gold or silver.
  • That means their value is pegged to the specific stable reserve asset it's tied or collateralized to. In that way, stablecoins are like the bridge between cryptocurrency and their reserve assets.
  • Crypto still has the inherent issue of being volatile, and stablecoins set out to solve that problem, just like their name implies.
  • Ultimately, this provides both the instant transaction speed and privacy of crypto while accomplishing the stability and backing of reserve assets. 
  • Some of the most well-known stablecoins in the US are Tether, USDCoin, Binance USD, Dai, and others with an aggregate market capitalization of more than $100 billion.
  • There's an inherent risk though. A large majority of such coins are backed by companies or organizations that claim to have every invested dollar backed by fiat currency or assets with the equivalent value. Yet there's no way to know with any certainty what the companies are actually holding. 
  • And none of these coins are regulated like a national currency or exchange-traded commodities.

Are they for you?

Today, stablecoins aren't really meant to be an investment or used as such. They’re a value holder that serves as a substitute for USD or any other fiat currency you might’ve used otherwise. Just like NFTs are usually bought with Ethereum, stablecoins are for purchasing crypto or holding cash in a wallet.

They can be a viable option for users whose traditional currency tends to be volatile, for those who need to transfer money between exchanges or wallets, or simply to store some funds on an exchange on standby for periods between investments. Crypto traders usually keep their money in stablecoins invested on a crypto exchange in between crypto trades to avoid paying the high fees to cash out.

Thought for the road

The SEC is looking to start regulating the cryptocurrency industry more heavily. Whether that’s good or bad is not for us to decide, but despite their seeming innocence, stablecoins won’t likely be exempt from this audit. 

In pursuit of this, the White House has actually formulated a couple specialized, Treasury-led committees to look into these coins, and they seem to be planning to recommend that the Financial Stability Oversight Council (FSOC) consider whether or not stablecoins pose a broader financial risk.

While this is all up in the air at the moment, regulation to some extent seems all but certain.

₿ Need a review of the basics of cryptocurrency? Look no further:

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