What Is A Stablecoin?
A stablecoin is a form of cryptocurrency that pegs its value to a fiat currency, like the US dollar. Meaning that for each coin in existence, there is a US dollar in cash reserves that keeps the value of the stablecoin at 1:1 with the dollar.
Most fiat currencies can’t peg the value of other currencies outright, there are usually political agreements between countries that determine the comparative value of one currency to another. Instead, cryptocurrency simplifies this process by allowing a person or company to produce a stablecoin and keep reserves to ensure the value never fluctuates.
Stablecoins are used in a variety of different investment strategies, yet ultimately are used to achieve price stability.
The largest and most notable stablecoin is Teather (USDT). USDT makes up roughly 48% of all crypto trading volume. One notable issue with Teather Ltd. (the company that produces USDT), they’ve never proven their reserves are fully backed with US dollars. They could be holding riskier assets as backing, and if those assets go down in value then Teather may no longer be tethered to the US dollar. It may lose too much value if the assets it holds in reserves cannot exactly match the value of the US dollar in a 1:1 ratio of coin-to-dollar.
And if Teather is the biggest and most notable, then one can only imagine what the others hold while still claiming to provide “stability.”
Side Note: Fiat means government-backed