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After Bitcoin was introduced to the public over a decade ago, people started to see more and more alternatives showing its presence in the market, such as Ethereum, Litecoin, Ripple, and so much more. Right now, the majority of the people are already wondering how much money they would have made if they had bought 1,000 dollars worth of Bitcoin during its early days. These cryptocurrency coins are considered to be highly unstable due to their volatility rate, not to mention that they are not governed or regulated by any centralized entity or bank because they don’t consider crypto to be official state money. So, the question remains, is there a safer alternative to prevent crypto’s volatility, and how does it work? To know more about stablecoins, keep reading below.
What’s So Stable About Stablecoins?
Even though the first-ever digital currency still remains the most popular cryptocurrency asset, it still tends to experience high volatility in the market. Take Bitcoin, for instance; the asset’s market value rose from 5,000 dollars in March 2020 to almost 65,000 dollars a year later; of course, its market value plunged by as much as 50% to around 30,000 dollars at the end of June 2021. Even if the market values of digital currencies can get wild, it’s relatively common to see the asset’s market values move in excess of 10% in either direction in just a few hours.
This kind of volatility makes cryptocurrencies, especially Bitcoin and other crypto coins, unsuitable to be used by the public for everyday use. In essence, a currency should act as a medium of exchange and some sort of mode of monetary value storage, and its value should be significantly stable over long periods of time. With that in mind, it’s now ideal for a crypto coin to maintain its purchasing power while having the lowest possible inflation rate, which can make the asset sufficient enough to be used as a daily means of exchange instead of just saving them up. And because of that, stablecoins are created, which provides solutions for these types of issues and to achieve acceptable behavior to become a real currency in the real world. Still, future trends will reveal whether these are going to be the new currencies. To stay informed, visit some of the trading platforms such as BitiQ.
Why Was Stablecoins Created?
Compared to traditional digital currencies, Stablecoins are relatively different compared to them as the first-ever crypto was developed and released to the public in 2009, but the first stablecoins were created five years after. And it’s initial purpose was to help facilitate transactions in the crypto space because, at the time, banks or other government entities were a bit reluctant to give accounts to digital currency companies.
Given that everything about digital currencies is with anonymity, as well as their potential for money laundering, tax evasion, and terrorist financing, banks or some other government entities were not so keen on having this type of business firm being present in their books. Ultimately, crypto exchanges and miners would need a way to use real currencies, especially US dollars, without the need of using the banking system.
While all forms of illegal activities are still a problem with digital currencies, the market for crypto eventually grew too big for the US regulators and banking system to simply ignore. Also, with the recent surge of coins available today, which now have more than thousands of different crypto coins, the trust in stablecoins has been steadily growing as well. And now, regulators and banking giants have started to engage with cryptocurrencies, and centralized banks are now contemplating the possibility of creating their own form of digital currency.
Who Regulates Stablecoins and Are You Protected?
As for now, there’s no actual legal federal framework yet in regulating stablecoins as the states and regulators have done more in calling out alleged violations with stablecoin providers under the rules that have currently existed. For instance, the CFTC or the Commodity Futures Trading Commission declared that for nearly four years, Tether didn’t fully back stablecoins with real currencies such as US dollars. With that in mind, the technology didn’t have enough real currencies at their disposal to pay back each investor who might have cashed out their Tether stablecoins.
One of the main concerns about a company not holding enough fund reserves to back up its stablecoins is that it couldn’t meet demands if there’s the possibility of having too many of its investors cashing out simultaneously. Regardless, federal regulators are now trying to draft new rules and regulations towards stablecoins and defining stablecoins better whether it is to be regulated as a security, such as an exchange-traded fund.
The Risks Involved with Stablecoins
Digital currencies, in general, are highly volatile assets as they can suddenly have their market values go up significantly, only to go down to unacceptable numbers the next moment you check. And because of that, the majority of the potential investors are scared to put money into crypto, not to mention that the technology is largely unregulated. However, compared to other digital currencies, stablecoins are relatively a safer bet if your primary goal is to gain back the money that you’ve put in the asset in the first place.
Some people see stablecoins as some sort of fast and low-cost means in trading crypto assets, as well as moving funds across borders, which can be relatively helpful to individuals who work away from their homes and into another country. Not to mention they will be able to conveniently send money back to their families without the hustle and bustle of transferring money through traditional means. With that in mind, because of how many different issuers of stablecoins already have their own degrees of transparency and policies, you would have to do extensive research before thinking about buying stablecoins through any of them.
Even though stablecoins may seem to be relatively safer compared to traditional cryptocurrencies, the damage to crypto still needs to be considered. This is because when large whales move down the crypto market, they can secure a significant amount of assets which creates a big blow to the price of cryptos, and they all do this while securing themselves to stablecoins. Despite the advantages of stablecoins, many investors still see the asset as some sort of obstacle to the rising prices of digital currencies. Regardless, for investors and small traders, switching from traditional crypto to stablecoins doesn’t significantly affect the price in the crypto market.