Does stablecoin offer investors strong stability? Is this the end of crypto? How long will the prices continue to drop? What coin is safe to invest in? This question will keep surfacing in the minds of investors as the whole crypto sphere is struggling at the moment. It seems like an endless journey down the slope as no micro or macro reason can be cited as the cause of the slump. Not surprising due to the volatility of cryptocurrency, but no one could ever foresee such downward movement.
The damage is so severe that no coin has been spared from this onslaught. While the damage keeps hitting and fear continues to hold every investor, the stablecoins segment looks healthy. At the moment, this segment of cryptocurrency seems to have a shield guiding it against the dip. Without a doubt, the stability stablecoin is enjoying at the moment strongly reflects that it’s fulfilling its purpose. Though, this is one of the few times it will be useful because any stablecoin will never reflect any future boom.
Obviously, everyone knows stablecoin is pegged to certain fiat to give it stability. Most times, there is a general misconception that the strength of a stablecoin lies in its host fiat. However, some major players working behind the scene to offer it a shield. Notwithstanding, these volatile-immune tokens gain protection from other sources aside from fiats. The source of protection may vary, but one is thing compulsory, a stablecoin must have strong reserves. Most developers of these stablecoins often claim they are tied to certain fiat, how’s that even possible?
How Reserves are vital to stablecoin and its stability
The US Commodities Futures Trading Commission at a time engaged in a dispute with Tether after an investigation revealed that the stablecoin doesn’t have enough reserves. According to reports, it manifested that Tether’s reserve only has a 27.6% reserve for its total stablecoin in circulation. The CFTC is doing its job toward protecting investors against scams and other fraudulent activities.
The legal dispute between the two was indeed an eye-opener for the industry. As of then, Crypto still beckons for regulation but the event revealed the importance of regulating crypto, alongside its brother, stable coins.Therefore, the CFTC investigated and discover that Tether doesn’t have to the a claim amount. Above all, Tether ended up paying a significant amount as a fine along side Bitmex.
Additionally, stablecoins must have 100% reserve for the tokens in circulation. However, these reserves don’t compulsorily imply a fiat because reserves can contain other valuable assets like Gold, Shares, and Crypto. As long as the reserve is worth the total coin in circulation it’s strong enough to back a stablecoin.
Technically, stablecoin doesn’t derive strength from the host fiat or assets, instead, the strength lies in its reserve.This implies that irrespective of how bad prices fall or things change, or dip. The value of a stablecoin will remain the same since the value of the reserve is by the token in supply.
Assets pegged with stablecoin
Furthermore, the role of a reserve in stablecoins and their stability cannot be overemphasized. The reason is that they serve as collateral on behalf of the company to prove that all funds are safe. So, in the case of a hack, fraud, and other unprecedented ways one could lose money, every investment is safe.
One direct opportunity stablecoin benefits from these assets are that they give gain popularity and aid its utility. Unlike Crypto, utility sometimes helps boost its value, but stability will still retain its value. The foregoing has strongly established that volatility is alienable to stablecoins.
Considering how Stablecoin directly illuminates the value of its host fiat, one would think it’s only pegged to the fiat. Meanwhile, most Stablecoin coins are pegged to the US dollar which helps to ensure stability. Stablecoins peg with the US dollar are; Tether, Dia, USDC, Binance USD, TrueUSD, Terra USD. Also, Stablecoin pegged to Gold are Tether Gold, DigixGlobal, PAX Gold, Gold Coin, Perth Mint Gold Token, etc.
Lastly, the above mention tokens directly reflect the price per unit of the assets they are pegged with. The reserve is the backup plan but it’s still a shortcoming because prices don’t grow which has limited stablecoins for transfer charges.