Tom Merritt shares the most important information you need to remember about crypto stablecoins.
You may have heard of stablecoins and thought it sounded like a good idea. After all, most cryptocurrencies are pretty volatile, so why not have one that is meant to be stable?
You may also have heard about stablecoins crashing and wondered: Well, how did that happen? I thought they were supposed to be stable?
Here are five things to know about stablecoins:
- Stablecoins are generally considered to be US dollars. Many stablecoins are pegged to the US dollar in such a way that the issuer promises to always exchange one coin for one dollar.
- Stablecoins can be backed by many things – not just US dollars. Some stablecoins are pegged to other stable reserves such as gold. They can also be bound to a supply control algorithm to keep it pegged to a specific value.
- Stablecoins don’t need to be backed by anything. There is no regulation on what is labeled a stablecoin. The Terra stablecoin is backed by another cryptocurrency called Luna, which is pegged to the reserve of a lot of other cryptocurrencies. It is one that uses an algorithm to try to keep its value. That algorithm ultimately failed.
- Even dollar-backed stablecoins are not actually dollar-backed. A stablecoin called Tether uses a mixture of corporate debt, cash, and treasury bills. The idea is to have some holdings that can be liquidated as quickly as needed but also appreciate in value.
- Stablecoins are very useful for transferring money. While Bitcoin can be relatively slow and Ethereum can have high fees, when stablecoins are truly stable, they can make transfers much faster and cheaper than the traditional banking system.
Just because it’s stable in the name, doesn’t mean it’s completely stable. Emptor caveat never applied so well.
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