Stablecoins like Tether appear to have weathered the crypto storm on the surface, but are they really as stable as they sound? What’s the solution for a dollar-pegged token not to be centralized and insolvent?
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Stablecoins Aren’t as Stable as You Hope
Your portfolio may have taken a hit, but today we’re going to look at some cryptos that haven’t lost their value. Stablecoins are tokens whose value is pegged to the dollar or other fiat money. That makes a convenient way to protect your portfolio from market drops, without having to sell all your crypto. Most stablecoins have a reserve of dollars, equal to the number of tokens in circulation, just like a bank. Unfortunately, backing a stablecoin with fiat is easier said than done: Tether, one of the oldest stablecoins, has been faced with repeated accusations of insolvency after it was unable to produce audits of its bank accounts. Although there’s no telling how accurate those reports are, the difficulty of redeeming Tethers for dollars caused prices to fall under a dollar several times, most recently as low as 85 cents.
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There are several stablecoins trying to improve on Tether on the Ethereum blockchain. Gemini Dollars, Circle USD and Paxos Dollars are all fiat-backed stablecoins, supported by dollars in the bank. Organizers say that making their accounts transparent reduces the counterparty risk of relying on a single company for custody. Unfortunately, even the best solutions are still centralized, because those dollars have to be somewhere.
That’s led to more exotic solutions. Tokens like Basis, which is currently in development, are pegged to a dollar but they don’t have any dollars backing them. Instead, an algorithm controls the coins’ inflation to maintain the value, just like a central bank does with fiat currency. These kinds of stablecoins are still under development, but they’re widely anticipated with hundreds of millions in funding. On a price action note, trading such stablecoins is like trading in the tradition forex market, because they are pegged to a traditional, fiat currency. So it might be less exciting for crypto enthusiasts.
Now I’d like to hear from you. What are your thoughts on current and future stablecoins? Will you jump on an investment opportunity in the new, algorithm-backed ones? Let me know in the comments, and subscribe to get more updates. Remember that as the 4th point of the IDDA technique, you must calculate your risk tolerance before deciding on the investment strategy that is suitable for your portfolio.
Don’t forget to complete your risk management due-diligence before developing your investment strategy.