How stablecoins survive crypto-fluctuations
The crypto market is quite turbulent nowadays. Will stablecoins help to go through these difficult and stressful times? Let’s find out in this article!
Disclaimer: All written in this article is not financial or investment advice and can be used only for informational purposes.
What is a stablecoin? What are their benefits?
Stablecoins are less volatile since they are pegged to more stable assets (i.e., gold, USD, another fiat). They are popular because they operate as a sort of middleman for traders, allowing them to exit market positions and benefit from their profits.
Tether (USDT), USD Coin (USDC), and Binance (BUSD) are among the most popular stablecoins in terms of market capitalization. Other more stablecoins play an essential role in the market today. Stablecoins are classified according to their underlying collateral structure, such as fiat-backed, crypto-backed, commodity-backed, or algorithmic.
Stablecoins are as crucial to crypto investors and traders as fiat currency is to traditional market players. When volatility rises, traditional investors may transfer certain assets from their portfolios into cash or stocks, whereas cryptocurrency investors may shift towards stablecoins.
What is going on with stablecoins in 2022
Meanwhile, regulators treat stablecoins quite suspiciously. Thus, in August, the issuer USDC Circle was ordered to restrict the USDC wallet addresses of its Tornado Cash service. Then, the United States Treasury Department sanctioned Tornado Cash. A class action lawsuit in 2022 alleging the issuer misled investors about USDT.
Risks and warns
There can be no low-risk cryptocurrency instruments, including stablecoins, in the crypto world. One of the main operational risks of stablecoins is that any business organization can become a token issuer.
Stablecoins reduce market risk, such as price swings, but liquidity risks remain. When utilizing stablecoin, you should always consider what it is backed by and carefully select your storage platform.
Issuing companies for various stablecoins have established procedures for locking funds within their blockchain. You know this term as crypto staking.
Staking during market volatility
Suppose you are locking funds for some time, then receive a percentage of your stablecoins. The annual percentage yield (APY) varies greatly; therefore, choosing the platform is entirely up to you. High-interest rates often indicate unreliable issuers.
Stablecoins prospects in 2023
Stablecoins will continue to play a significant role in the cryptocurrency market. The strength of the US dollar is expected to grow as the US government tightens monetary policy in response to increasing inflation. Precious metals are also a haven during economic uncertainty, and stablecoins pegged to these assets are expected to continue in demand.
All of the trends speak for the future of cryptocurrency; the tendency towards stablecoins accumulation and crypto holding is probably continuing. Large investors are pouring money into cryptocurrency with no intention of ceasing.
However, many people feel that the active acceptance and spread of various forms of stablecoins will lead to wild speculation in the absence of credible regulation. Otherwise, legislators increasingly regulate the market; this is unlikely to be a problem.