Crypto Investors Flock to Stablecoins Amid Market Volatility
Crypto Investors Flock to Stablecoins Amid Market Volatility
While a recent crash in the crypto market has sent jitters throughout the wider financial world, investors in stablecoins have seen their values rise in the latest wave of volatility. The popularity of these currencies stems from their underlying value being fixed by a peg to a traditional fiat currency or commodity.
As a result, these currencies provide a level of stability that is needed for widespread adoption and remittance of cryptocurrencies by developing nations. In addition, these coins allow users to transfer money instantly and securely, often with low or no fees.
Stablecoins are also a potential solution for international bank transfers, which can be time-consuming and costly. They can save migrant workers money by avoiding international currency conversions and other foreign exchange charges, as well as by cutting out the time it takes for traditional banks to clear funds.
The stability of these coins, which are backed by a range of assets including precious metals, oil and other cryptocurrencies, offers consumers an alternative to riskier cryptocurrencies. This can be helpful for people who have been burned by cryptocurrency volatility in the past and are looking for a safe way to store their funds or for those who want to diversify their holdings away from higher-risk assets.
Algorithmic stablecoins use an algorithm to match supply and demand and control the price of a coin, making them highly liquid and popular among investors. However, there are a few issues with this strategy: These algorithms can fail to keep prices stable.
Asset-backed stablecoins, meanwhile, maintain their value by storing enough reserves to back their tokens. The most popular of these is Tether, which claims to hold one dollar for every token it issues. Other currencies, such as USD Coin, claim to be backed by cash or short-term government securities.
These coins have their place in the DeFi ecosystem, but they need to be regulated. A report issued earlier this year by the Organisation for Economic Co-operation and Development found that stablecoins should be regulated as an instrument of financial intermediation in order to ensure their stability and reliability.
This will require a granular approach to regulation that will address each stablecoin issuer’s particular exposures to traditional financial sectors. This is especially relevant for those stablecoins that are centralized in nature.
Some centralized issuers of stablecoins have shown a desire to make money through the straightforward charging of redemption and issuance fees. They may do this by selling governance tokens or by locking funds into smart contracts on the blockchain. This type of revenue mode can put stablecoin issuers at risk for counterparty risk, a form of risk that can be caused by another party in the transaction failing to fulfill their obligations.
This risk is important for stability because it could lead to an outflow of funds from the stablecoins or a run on their value. If this happens, it could have a detrimental impact on the entire ecosystem. It would therefore be crucial to ensure that all centralized stablecoin issuers meet strict regulatory requirements.