The cryptocurrency ecosystem started with Bitcoin, but it was not good enough on its own to persuade the public that it represented the future of online trading and making payments. Numerous thefts are reported from digital wallets and the mining environment. This led to a massive problem while governments seemed skeptical and hostile towards it.
Bitcoin was highly criticized due to a lack of consistency. Although it had become popular among the investors in the stock market, its volatility made the investors, including Microsoft, withdraw support. Several other attempts to make better crypto that would surpass Bitcoin have been made. There was a high interest in creating more cryptocurrencies that would be used on real-world commodities. That has led to the emergence of stablecoins which are stable virtual currencies that are used in the market at a very high rate.
The stablecoin boasts three main traits which include being that it is centralized and pegged to tangible assets at a given fixed ratio. The centralized ones are pegged to some commodities including precious metals that attract a given value. The other type is the decentralized ones which are pegged to other currencies. The use of assets carries a more significant risk noting that the greater risk associated with the instability of the cryptocurrency. Some countries, including China, plan to stop Bitcoin mining which would be very detrimental. This is considering that its citizens comprise a significant number of bitcoin miners in the globe. If mining ceases, the Bitcoin will cease to function, and its value would get reduced to zero including that of other currencies pegged to it.
Bitcoin is going through hard times because of diminishing support from the other crypto. This is including stablecoins which are in turn leading to losses. Therefore, tagging the new crypto to tangible assets assures the investors that the currency is stabilizing and establishing itself in the highly crowded market. Global companies and banks have taken the challenge to introduce new currencies. Some social trading platforms such as eToro have introduced several coins and promised to release more.
A stablecoin is released and distributed according to the prevailing market conditions. Unlike the government-issued currencies, which are only issued depending on monetary policies. The pegging process happens at a given fixed ratio depending on the coin developer to retain significant reserves that are pegged in the currency and then assets covering the stable coin investors. Some coins have been compelled to break their pegs due to insufficient reserves.
One main characteristic of a stablecoin is its independence from the fiat currency, which is highly regulated. Pegging them to valuables including gold, sterling, and shares help to maintain a connection with the real world, although it might not be entirely advantageous. In case of an oil price rollback, the stable coins pegged to it will also suffer the drop. However, it would be less risky than if it’s associated with decentralized currencies. Even if a lot of cash is invested, it can’t prevent the non-decentralized basis of the stablecoin.
If only sufficient reserves are maintained, the benefits of a secure and stable instant digital cash platform are numerous. This can be enjoyed across the globe without the worry of exchange rates or privacy concerns. However, stablecoin still attracts a huge risk. Any market leader can come up and get more acceptance on the mainstream. But this is always accompanied by high profile risks especially when it’s dependent on fiat currencies.
Although volatility is a positive factor when the traders know the right time when to buy and sell, the majority of the cryptocurrencies remain a risky investment. However, if you want to access the decentralized benefits of crypto, but you are uncertain about the unpredictable prices, then the stablecoin is a better alternative.