- Significant cryptocurrency volatility has affected stablecoins, traditionally seen as the market’s safe havens, with investors withdrawing funds and several losing their peg to their underlying assets.
- Another point to think about when considering the stability of a stablecoin is economic insecurity and inflation.
Stablecoins have been called into doubt by crypto investors due to recent difficulties some projects have experienced in maintaining their value. The overwhelming bulk of stablecoins is backed by fiat money. Tether, USD coin, and Binance USD, the third largest, all claim to be pegged to US dollars. Others are tied to the euro and yen, but these comprise a tiny portion of the category.
The digital asset markets are suffering after crypto lender Celsius suspended withdrawals and transfers between accounts following the fall of the terraUSD stablecoin, as well as worldwide stiffening of financial standards rendering high volatility such as cryptocurrencies less appealing.
Coinmarketcap data displays nearly all of the stablecoins organized by market cap. Only 42 are now tied to the dollar, with values ranging from $0.99 to $1.01.
Stablecoins, according to many, have delivered the long-promised expected utility to the cryptocurrency industry. While this was shown in 2020, some risks are still associated with entirely trusting the stablecoin structure.
According to a Reddit user u/Cryptizard, is that people sought to give absurd, untenable APYs to go along with them. Intrinsically, there is nothing wrong with a stablecoin, but everyone in crypto is seeking quick gains, so the thought of a coin that only represents $1 and does not make you a lot of money is appealing.
Instead, they must take that liquidity and make increasingly bizarre investments/bets to keep everything from crashing. The issue isn’t with stablecoins; when people read 10-20% guaranteed returns, they think “take my money” rather than “that’s too good to be true.”
Economic Instability and Inflation Issues are other factors to examine when determining how stable a stablecoin is. Simply explained, there is a reason why most stablecoins are tied to high-performing and stable currencies such as the USD or EUR.
This is because the USD, and hence the US Treasury, conveys an image of security that has lasted at least a half-century. If stablecoins were released under a far worse-run economic fiat currency, no one would swap their money for it, resulting in no liquidity and thus no value. This, however, exposes your stablecoins to global black swan occurrences or rapid economic disasters that can lead to inflation.
The Future of Stablecoins:
Investors may question how successful stablecoins will be in providing liquidity to the crypto market in light of the UST catastrophe.
However, it is critical to maintain a level head in these situations and recognize risks associated with anything, especially digital currencies – even ones as solid as stablecoins.
This dynamic region will continue expanding, growing, and fragmenting into new sectors at breakneck speed.