It is no secret that the cryptocurrency market is highly volatile with the price of cryptocurrencies such as Bitcoin (BTC) surging and dipping aggressively. This kind of price movement is not ideal for a currency, and this is why the concept of stable currencies is gaining traction.
A stable coin price is usually pegged to another asset such as a fiat currency such as the dollar or an asset such as gold. One of the major advantage of this approach is that fiat currencies are much more stable thus meaning a stable coin is more usable in real-world conditions compared to non-stable coins.
Bitcoin for example surged from below $5,000 in 2017 and managed to surge past $19,000 before the end of the year. However, its price this year has dropped from the previous highs seen last year and has even hit a low of around $6,000 with the price remaining highly volatile. This makes it less usable as a currency and underscores one of the major downsides of cryptocurrencies in transactions.
With such cryptocurrencies, changes are that a product bought today with a specific amount cannot be bought with the same amount tomorrow if the price fluctuates. A stable coin price thus makes more sense when it is pegged to a currency that is stable because it is not only more usable for daily transactions but it also allows exchange dealings to be easier while ensuring less loss of value.
The role of stable coins in the grand scheme of things
Major cryptocurrencies such as Bitcoin and Ethereum (ETH) are not ideal for day-to-day transactions due to their high volatility. One of the major reasons for which they exist is to facilitate digital payment with ease and at a rapid pace. Stable coin price stability makes them better suited for digital payments than their unstable counterparts.
The real-world usability of stable coins makes them more suited for use especially in the banking industry to facilitate the transfer of cash or payments across borders. This explains why more companies are becoming more interested in stable coins.
Stable cryptocurrencies are banking on their stability to attract adoption. Many banking organizations all over the world have been looking to blockchain technology and cryptocurrency to improve their services. A stable cryptocurrency makes so much sense for such banks because it helps avoid the dangers of the volatility that exists in regular cryptocurrencies.
One good example of a stable cryptocurrency is Tether (USDT) which is pegged on the U.S dollar. Using such a cryptocurrency is also advantageous to traders who use crypto exchanges that do not provide currency pairs with currencies such as the US dollar. Having a cryptocurrency that offers a similar value makes it easier for traders to cash out quickly, especially in risky market conditions. In other words, it can be thought of as having a digital U.S dollar.
Meanwhile, stable coin ICOs are similar to the ICOs of other cryptocurrencies but the advantage of stable coins is that they promise more stability compared to non-stable cryptocurrencies. In the same manner, there are stable coin wallets which can be used to store stable coins.
Is the volatility of the asset pegged upon a factor to consider?
It is also worth pointing out that a stable coin is as stable as the currency or asset that it is based on. For example, the value of the dollar goes up or down because it is also traded on forex markets. This also means that their value is affected when the fiat currency is affected by market factors such as inflation and this is one of the downsides of such cryptocurrencies.
Stable coins are still a relatively new concept in the market. However, if they are implemented properly, they will most likely gain more popularity and also have a significant positive impact on the digital currency market. So far stable coin prices have demonstrated that they have a valued use case and might therefore be here to stay.
Stable coins may offer a glimpse into the future of cryptocurrencies as a more stable option for day-to-day online transactions.
New in this world? Take a look at the complete beginner’s guide on how to invest in crypto.
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. Do your own research and make sure you read our full Disclaimer.