Stablecoins

Stablecoins are a class of cryptocurrencies that attempt to reduce the overall volatility in the cryptocurrency market by pegging their value to a basket of goods (reserve assets), such as a fiat currency like the USD. Stablecoins have garnered popularity as the cryptocurrency space evolves as they provide the best of both worlds, that is, instant processing, as well as security and privacy of payments, and then providing a volatility-free stable fiat-like currency.

As stablecoins are asset-backed cryptocurrencies, the assets that stabilise the stablecoin are actually outside of the cryptocurrency market, meaning the underlying asset is not correlated, reducing an investor’s financial risk. Cryptocurrencies such as Bitcoin and Ethereum are usually very much correlated, thus when for instance, BTC falls heavily, we usually see coins like Ethereum fall too, meaning investors cannot exit the market unless they take refuge in an asset backed stablecoin.

“Its purpose is to provide stability of price as people are transacting across coins or between fiat and digital currencies, because crypto markets can be volatile,” states Doug Boneparth, a financial advisor and President of Bone Fide Wealth.

There are a range of stablecoins available backed by baskets of goods, such as fiat-backed, commodity-backed and cryptocurrency-backed. A popular fiat-backed stablecoin is Tether (USDT), in which 85% of its reserves are roughly cash, cash equivalents, short-term deposits, and commercial paper. A popular commodity-backed stablecoin is Digix Gold Tokens (DGX), that ties the native token to gold. A popular cryptocurrency-backed stablecoin is Wrapped Bitcoin (WBTC), which uses a wrapped tokens framework to make Ethereum backed 1:1 by Bitcoin.