Stablecoins: The Calm Amid Crypto Volatility

Stablecoin is a cryptocurrency with extremely low volatility that is sometimes used as a means of portfolio diversification. For example, a cryptocurrency backed by gold or a cryptocurrency tied to fiat.

What is stabelcoin?

Stablecoins are cryptocurrencies with a fixed value, usually tied to a leading fiat currency such as the U.S. dollar, a basket of fiat currencies, or an exchange-traded commodity such as precious metals. Stablecoins act as a much-needed antidote to price volatility in cryptocurrency markets. Stable currencies are backed by an underlying asset, usually the one they represent digitally, to provide the same price stability as fiat currencies.

Stablecoins, such as Tether (USDT), are backed by the U.S. dollar at a 1:1 ratio. For every unit of USDT in circulation, $1 must be set aside and held in reserve by the issuer Tether Ltd, controlled by the founders of the Bitfinex cryptocurrency exchange.

The number of Stablecoins has increased dramatically in recent years, as has their variety. There are many crypto-assets tied to other fiat currencies, such as euros, and even other crypto-assets!

Some stablekcoin projects have digital assets tied to precious metals or other cryptocurrencies. For example, Facebook’s failed Libra (now Diem) project planned to use stabelcoins as a means of payment – backed by a basket of different national currencies.

Stablecoins are very easy to acquire and are listed on most cryptocurrency exchanges, including Binance and Coinbase. Simply put, they provide desirable liquidity and solid protection for crypto investors and are an integral part of the digital asset space.

While there are constant rumors of new regulations targeting stablecoins, they continue to be tolerated by authorities around the world due to their typically high compliance with financial regulations. Stablecoins have almost certainly served as an inspiration and textbook for central bank digital currencies (CBDCs).