What Is a Stablecoin? #
Stablecoins are cryptocurrencies that provide price stability and have a reserve asset backing them up. The popularity of stablecoins is growing due to their attempt to offer the best of both worlds – instantaneous processing and security of cryptocurrency payments, and volatility-free stable valuations of fiat currencies.
- A stablecoin is a cryptocurrency that attempts to peg its market value to some external market reference.
- It is possible for stablecoins to be pegged to a currency, such as the USD, or to a commodity, such as gold.
- Through collateralization (backing) or algorithmic mechanisms, stablecoins maintain their price stability by buying and selling the reference asset or its derivatives.
Stablecoins explained #
Although Bitcoin (BTC/USD) remains the most popular cryptocurrency, its value is highly volatile. At the height of the coronavirus pandemic sell-off in March 2020, it was around $5,000, but it climbed to almost $65,000 by April 2021 before plummeting by over 50% to around $30,000 by June 2021. Its price has since exceeded $65,000 in November 2021.1 Even its intraday swings can be wild; the cryptocurrency commonly moves by more than 10% in either direction in a matter of minutes.
Bitcoin and other popular cryptocurrencies suffer from short-term volatility, making them unsuitable for everyday use by the general public. In essence, a currency acts as a medium of exchange and a means of storing monetary value, and its value should remain relatively stable over time. Those who are not certain of its purchasing power tomorrow will refrain from adopting it.
The lowest possible inflation should be achieved while crypto coins maintain their purchasing power so that they are more likely to be spent than saved. With stablecoins, this can be achieved.