Why Stablecoins are important?
Over the past decade, the blockchain technology and cryptocurrency market have been skyrocketing that it creates a threat to disrupt our traditional finance. Among thousands of new crypto born, stablecoins have gained popularity with their value stability that aims to deal with the issue of crypto volatility. Today, Tokenize Xchange will look into the importance of stablecoins, their risks, and their opportunity.
Stablecoin is a type of cryptocurrency created with the aim of minimizing the impact of volatility by pegging to a range of stable assets such as real money (fiat money), commodities (gold, silver), or other cryptocurrencies.
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Why stablecoins are important to the cryptocurrency market
Stablecoins appeared to solve the biggest problem in the cryptocurrency market right now, which is high volatility. Instead of transferring to Fiat, crypto traders and investors can easily transfer their digital assets into stablecoins to avoid the volatility of cryptocurrencies for their personal use.
Moreover, it is challenging for a business to accept payment in a cryptocurrency with a high fluctuation of 20-30% in value in a short period. In general, it reduces the possibility for cryptocurrency to be widely adopted.
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As such, Stablecoins can be considered as a bridge that connects the digital assets market and the traditional financial market. Converting from fiat currency to crypto is much easier today with Stablecoins.
Said Erik Voorhees, the CEO of ShapeShift: “Stablecoins are important in the same way that a bridge is important. You may not care much about the bridge, but without it, the beautiful land beyond is much harder to get to”.
The opportunity of stablecoins
The increasing implementation of stablecoins is an important factor to improve the popularity of cryptocurrency use as a mainstream medium of daily transactions, as well as other applications in payment, finance, and investment. Not limited to applications in trading digital assets in blockchain networks, crypto might be used in consumer loans and prediction markets as well.
However, if the transaction currency which is cryptocurrency remains highly volatile, and contains market risks, one of the transaction parties may lose their money due to price volatility. As such, stablecoins become the ideal solution for financial transaction issues in the future.
The risks of stablecoins
Though stable in value, stablecoins still remain some market risks such as reliability and currency inflation, particularly if their collateralized assets lose their value.
While fiat currencies are issued by the Central Bank and Federal Reserve controls the money supply by increasing or decreasing the monetary base, Stablecoins are not under any control and regulation. As such, they might bear risks in terms of collateral, asset contagion, and accountability and might harm financial stability at a significant scale.
According to Fitch, a credit rating firm, as of March 31st, Tether’s commercial paper (CP) holdings might be larger than most money market funds in the U.S, Euro, Africa, and the Middle East with $20.3 billion in value.
Said Fitch: “A sudden mass redemption of USDT could affect the stability of short-term credit markets if it occurred during a period of wider selling pressure in the CP market, particularly if associated with wider redemptions of other stablecoins that hold reserves in similar assets,”
To discuss the impact of stablecoins on the money supply, David Grider, head of digital assets Research at Fundrat Global Advisors said: “Stablecoins let you do something very interesting, which is to let you earn interest on both sides of the same dollar,”
Hopefully, when stablecoins are globally adopted, we may have stablecoins collateralized by every fiat currency of all the countries one day! See you tomorrow at Tokenize Blog!
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