In December 2017, Bitcoin had plunged from almost US$20,000 to as low as US$3,675. Therefore, many of the users are looking for a cryptocurrency more stable in nature. The future of cryptocurrencies like Bitcoin is uncertain, therefore, ‘Stablecoins’ have emerged as the new possible solution. Stablecoins hold a stable value as compared to other cryptocurrencies, which could serve the required purpose to the users.
Cryptocurrencies act as a form of digital currency which allows the user to perform transactions without an intermediary such as a bank. Many of the cryptocurrencies have no intrinsic value and price assigned to them is what others will pay. This price hoping has led to significant price volatility in cryptocurrencies. Like regular fiat currencies such as US dollars and Gold, Stablecoins aim to maintain their values by being redeemable to tangible values, unlike other cryptocurrencies. The monetary value that investors expect Stablecoin to trade it would be deposited with a trusted bank. If users are confident to redeem stablecoins for the said currency and the issuer has enough reserves for all coins in circulation, then the value of stablecoins should not decrease below its underlying asset value.
Tether, TrueUSD and USD Coin are the most popular stablecoins, out of which Tether experienced short-term volatility. Its fluctuation is between $0.989 and $0.95. USD Coins was slightly unstable, unlike TrueUSD though it experienced the biggest dip but remained 1.8% of the dollar. Stablecoins remained most stable out of all cryptocurrencies.
Why have Stablecoins become popular?
The recent downfall of cryptocurrencies like Bitcoin because of the inconsistent trading prices across exchanges, has proven the fact that cryptocurrencies are unpredictable. The users who wanted to make purchases with cryptocurrencies, the idea of fixed value to cryptocurrencies was an understandable appeal. Due to high regulatory interests and strict cryptocurrency operations in banking systems, cryptocurrency exchanges went far away from interacting with banks, thereby, restricting transactions between some popular cryptocurrency and real money. That is why to buy these cryptocurrency exchanges people needed existing cryptocurrencies – making Stablecoins a possible way to start.
While Stablecoins might decrease the risks related to price instability that buyers see in cryptocurrencies, it is unlikely they’ll really be used more generally. If demand increases, the system cannot make more stablecoins which is why user encounters many challenges using Stablecoins in day-to-day transactions. They are also not protected by compensation schemes making it unlikely people will replace their cash bank accounts. This doesn’t mean stablecoins have no future. Regular cryptocurrencies offer higher returns as compared to Stablecoins which also includes risk for users. Many Investment banks are also finding ways to take advantage of price volatility of cryptocurrencies. It can create opportunities for profit and will attract investors. Stablecoins could be more secure than real currencies in some circumstances, but the worth will still fluctuate if people lose confidence in its value.
Despite price volatility, Stablecoins are gaining popularity among investors.