Making the case for stablecoins
It can be stated that, through both surging market highs and the lows of the downturns of the market, stabelcoins are an integral aspect of cryptocurrency systems. With a total market cap of over $150 billion, stablecoins are attractive to crypto novices and experienced investors alike, intrigued by their unique value proposition: the stability of a traditional low-risk asset with the flexibility of a digital currency.
However, having recently received heat in the media (namely Terra Luna), stablecoins have yet to be proven as a secure asset class.
Originally perceived of as fool-proof digital equivalents of fiat currencies, the last year has revealed a number of drawbacks — while stablecoins can be considered low-risk, they cannot be thought of as “no-risk.”
Let’s take a look the various risks and drawbacks.
Security: this is true for all cryptocurrencies and the responsibility of ownership should not be underestimated. Unlike traditional bank accounts, digital wallets are not insured — if your wallet gets hacked, lost or stolen, your funds disappear with it.
Counterparty risk: Celsius, BlockFi, and even Coinbase have all been in the news in relation to counterparty risks, and investors must also be aware of who the third-party is.
Reserve risk: there have been questions about the entity behind stablecoins, and if they actually have the collateralized assets and reserves to back them.
Technical risks: This is specifically important for algorithmic stablecoins, which do not have actual cash reserves behind them. As we saw with the Terra fiasco, stablecoins may not be as stable as they appear. Algorithms aren’t perfect, and with the newness of the space, very few have been battle-tested during downturns or periods of low demand.
Accessibility: stablecoins, just like any other cryptocurrency out there, are globally accessible to anyone with an internet connection and are functional 24/7.
Speed and cost: stablecoins are relatively fast and cheap to use, with international payments executed within seconds and high transactions costing no more than a dollar to be performed.
Versatility: in addition to individual and business payments, stablecoins can be used for trading, borrowing and lending, earning yield as alternatives to banking.
The bottom line
Yes, the technology is still new and just because they are pegged to fiat currencies does not mean that the risks are non-existent. However, stablecoins are very promising and offer investors and traders a new means to dip their toes in the crypto sea in a way that is perhaps slightly less volatile than other coins.
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