Bloomberg on January 27 outlined several perks of stablecoins which have given them popularity over the years. Moreover, new investors may be more willing to enter the crypto market due to the less volatile nature of these assets. Popular among them are Tether, True USD, Dai, and Gemini.
Stable coins Gain Popularity Just Like Other Virtual Currencies
Per the report, stablecoins which were first launched in 2015 have become very popular in comparison with virtual assets like Bitcoin. Their popularity is attributed to their less volatile nature. As such, this gives them a more stable price unlike the sudden spike and dump in price, as is the case with Bitcoin.
Bloomberg also stated that this kind of virtual currency is tied to another asset, digital currency, or commodity that serves as its collateral. Consequently, their value is maintained and less likely to fluctuate. In line with that, the first stable coin, Tether, is reportedly backed by the dollar at a ratio of one is to one.
Tether’s Dollar Reserve Needs to Equate its Coin Circulation
According to the media, Tether needs to have a dollar reserve that equates the coin’s supply to prevent its price from fluctuating easily. The same is said about other stablecoins like the TrueUSD and Gemini. TrueUSD, for instance, is also backed by the dollar, but each time a user redeems the dollar equivalent, the coin is destroyed to maintain the dollar to coin ratio.
The perks of trading these stablecoins include the ability to save the gains made from trading other assets. Also, crypto enthusiasts who are expecting that a coin they’re holding will devalue may quickly exchange it for a stable coin whose price is less likely to fall alongside others in the market. The latter is evident with Bitcoin’s price falling over 70 percent in the past year and taking down the entire crypto market with it. However, most stable coins are still priced around a $1.
The Risks Involved in the Use of Stable Coins
While this type of virtual assets may have their perks, there are certain risks that may occur through their use, Bloomberg noted. An instance of this is the case where the dollar backing the coin is purely fictional, thereby giving investors false claims. It is also said that the market can be manipulated which could result in losses.
Most importantly, financial regulators could decide to classify them as securities which would mean either of two things. Firstly, they should be registered in a certain jurisdiction like the U.S. or their sale to customers in that region be discontinued. Reportedly, Basis, a proposed stable coin had its launch discontinued after its developers were notified that their bonds and token shares would have to be registered as securities under U.S. law.