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Stability in Volatile Markets: A Primer on ‘Stable Coins’


There’s certainly no doubt that the cryptocurrency markets are volatile. Unlike traditional equities markets, cryptocurrencies can fluctuate by unheard of percentages in a matter of hours. Now sure, sometimes that’s not a bad thing. For example, the high price fluctuation is perfect for those day trading and making a profit off of it; however, it’s not quite perfect for those investing with a longer timeline in mind. But what other options do investors have? Sometimes the markets are as rough as the sea and you’re stuck in a dingy but you want to be on a shipthat’s where stable coins comes in. Stable coins are the large ship you can use to wait out the volatile storm.

What Are They?

First things first: what is a “stable coin?” As the name illustrates, the product is an asset package offered as a coin to investors that’s intended to remain stable compared to the rest of the crypto markets. You might be wondering how anyone could possibly offer a coin that, unlike other cryptocurrencies, doesn’t fall victim to volatility. The reason the issuers are able to offer such strong promises is because the coin is actually backed, or ‘pegged,’ to another tangible asset. 

Essentially, when investors buy a stable coin, the coin is actually representative of ownership of another tangible asset. Sometimes this asset backing the coin is gold or silver, sometimes its a traditional fiat currency like the U.S. dollar or euro. Let’s take a look at some examples.

U.S. Dollar Tether (USDT)

Most in the industry are likely familiar with this first example. “Tether” is a cryptocurrency that is supposed to be 100% backed by the US dollar with a 1:1 ratio. That means that at any point in time, investors should be able to go to the issuer of the coin and trade in x amount of USDT for the corresponding amount of US dollars. For example, if you held 500 USDT, you should be able to go to the issuer and trade them for $500 of traditional fiat. The premise is quite simple, but important because it gives investors peace of mind if they need to trade into the stable coin.

Havven (HAV)

For our next example, let’s take a look at Havven (HAV). This cryptocurrency is an example of another stable coin, though approached in a different way. Unlike USDT, Havven is working on sticking with the importance of decentralization in the crypto community. In order to remain decentralized, it doesn’t exactly make sense to have a cryptocurrency backed by a completely centralized fiat currency like the US dollar. Instead, Havven is working towards developing and maintaining a completely stable coin using only the decentralized cryptocurrency system. You can read more about how they plan on achieving their plan here. 

Gold-Backed Coins

In addition to Tether and Havven, there’s also a class of coins rising in popularity: gold-backed cryptocurrencies. Unlike the two previous examples, DGX and Quint are two examples of cryptocurrencies that are backed by real, tangible assets like gold and silver, and can be traded in at any time for their corresponding value in gold or silver.

Final Thoughts

Stable coins are important for the cryptocurrency industry. By providing a safe haven for investors and traders alike, stable coins offer a key option for those looking to escape what can be dangerous volatility in the markets. However (and this is a crucial “however”), investors still need to do proper due diligence on the stable coins they choose to utilize. Though the coins ought to be stable for investors, there are potentials for abuse and lack of liquidity. In one famous case, an investor named Oguz Serdar attempted to redeem $1,000,000 worth of USDT with Tether, an attempt that was “refused” by the company. As with any other cryptocurrency, do proper research before choosing your stable coin of choice for the next time the market gets rocky.

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