Are Stablecoins Stable Enough to Be Trusted?

Many would-be players get turned off by the tremendous wave of volatility. That is until stablecoins appeared. Stablecoins, like all cryptocurrencies, are digital assets. Stablecoins attempt to tie their value to the value of another asset, such as a currency, commodity, or other cryptocurrencies. Stablecoins’ design aims to track the price of another asset, most often the US dollar.

Cryptocurrencies are the most well-known application of innovation in blockchain technology. On the other hand, fiat currencies, like USD or EUR, are backed by the market’s confidence in the issuing governments. But despite the immense benefits of stablecoins and their massive gift to the entire crypto market, many are still doubting stablecoins.

Doubts in Stablecoins

The biggest challenge for any stablecoin is acquiring confidence. In the case of blockchain, it has built-in trust from market participants by providing a decentralised platform not controlled by any single user and treating all users equally in the network. Stablecoins do not have that luxury, as they must maintain strict control over the supply of their stablecoins while also managing a portfolio of assets or collateral. Thus, they are inherently centralised. Stablecoins understand that this is an arduous task for them in this regard.

Moreover, stablecoins have debt leaving a possibility of default. Bitcoin does not have that risk of default even though it is volatile. Stablecoins are not volatile, but they have that risk because the underlying assets attached to them also have a possibility of default. Despite these doubts, there are actually reasons to consider in answering the question: are stablecoins stable enough to be trusted.

#1 It uses a model that is stable and not unusual

Most stablecoins claim to be backed by other assets ready to use for settling redemption requests or trading with market participants to maintain the price peg. This model is not unusual. In fact, national central banks also attempted to preserve a dollar peg.

Stablecoin’s premise is significantly less offensive than other cryptocurrencies, focusing solely on use cases and neglecting other factors like energy consumption for a moment. They appear to be backed by something and theoretically serve a purpose.

People, ironically, want to utilise dollars to manage risk and offer liquidity for crypto-to-crypto trades. However, they do not want to connect with the regular or legal banking system since it is too slow. It would also oblige them to identify themselves and do unsavoury tasks such as paying taxes. Stablecoins are a convenient middle ground because they are potentially as stable as dollars, hence useful as currency. But still, it is not a dollar, so there is no need to follow laws or regulations.

#2 Stablecoins are not fraudulent

Looking at stablecoins in their general concept opens room for doubts, but those can be lifted by looking at specific stablecoins. Therefore, whether to trust stablecoin or not depends on the stablecoin you will choose. That is because not all stablecoins are created equally, so knowing how they work exactly can help you choose one over the other when the time comes. The best stablecoins are the transparent ones, issuing audits regularly and keeping their users up-to-date on the latest technology’s continuous development.

Stablecoins resemble money market funds in some ways, but money market funds are more regulated, audited, and transparent. So, if you’re looking for a stablecoin, make sure it publishes a complete list of all assets it owns. There are no good reasons why a stablecoin company cannot conduct a thorough audit to dispel investor and user concerns.

#3 Stablecoins provide a risk-off instrument

The stablecoin market has instilled increased trust by providing a risk-off mechanism. It has expanded and improved in efficiency. Stablecoins’ value is rising at breakneck speed, according to a report in France24. All stablecoins had a market value of roughly €157 billion in December 2021, up from $5.6 billion at the beginning of 2020.

Stablecoins provide the same value to investors, traders, and exchanges as fiat money does to the participants of the non-crypto currency financial markets and stability. In contrast, non-crypto currency investors will allocate portions of their portfolios to cash, treasury bonds, or money market funds when volatility intensifies.

Stablecoins that track the value of fiat currencies like the US dollar or the euro are the most popular. However, with the crypto market being as unpredictable and chaotic as it is, stablecoins have tapped into a market of those who want to participate without having to deal with market swings. It is relatively safe to have crypto that behaves like USD or euro. When market waves occur, market players have a place to take a breath. Stablecoins provide a sense of stability in a volatile market by keeping their value fixed.

#4 More people are trusting stablecoins

There are several reasons the crypto market participants moved to stablecoins instead of cashing out into fiat. For one, staying in the crypto market allows them to move faster between trades without having to wait for days to transfer to fiat currency. It is also true that not all cryptocurrency exchanges support the use of fiat currencies, leaving stablecoins the only option.

Some crypto brokers also have space for stablecoins. According to Bitcoin Loophole, “Though there are thousands of altcoins in existence, Ethereum, NEO, Tezos, Cardano, Tether, Binance Coin, and Chainlink are among the most traded assets.” Of these, Tether is one notable example of a stablecoin. The fact that it can compete for attention with giants like Ethereum and BNB speaks for itself. Thus, it’s clear that stablecoins are gradually becoming more and more attractive to investors.

Market participation in terms of volume and market value has progressively increased since stablecoins provided a mechanism to find safety in the cryptocurrency market. Because of the growing confidence in the crypto market, more people are opting to participate in a market with more possibilities. More movement or volume has happened as stablecoins instil more confidence in the market by providing a haven for players. However, the increased volume had a corresponding effect on liquidity, making the bitcoin market more manoeuvrable and efficient. Increased efficiency also means more precise pricing that translates to fairer asset prices and narrower bid-in ask spreads.

Conclusion

Stablecoins serve as the bridge between paper currencies and cryptocurrencies. There are reasons to doubt stablecoins, but looking at specific stablecoins compensates for it. Therefore, deciding whether stablecoins are stable enough to be trusted depends on the extensive knowledge of an individual of its general concept and the specifics of the prospect of stablecoin.

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