Are Stablecoins Really Stable?

Are Stablecoins Really Stable?

Business Finance

The buzz surrounding cryptocurrency is enormous. And rightly so; with the emergence of the digital era, digital currencies will play a paramount role.

Bitcoin has dominated the crypto market for almost a decade – no cryptocurrency has even come close to challenging Bitcoin to take its crypto throne.

Today, Bitcoin has a market cap of over 1 trillion dollars, and it is just the beginning!

Carl Runefelt is a global crypto leader and social icon who is a staunch proponent of Bitcoin.

While speaking on his YouTube channel, The Moon, he says, I believe that the Bitcoin price can go up significantly in the future. Bitcoin is the best hedge against inflation that we have in the world right now, and Bitcoin is also the best form of money that we have and have maybe ever seen in the history of humans. With that said, fiat is the worst form of money we have seen in the history of humans, and I see a huge transition now where we’re going to go more towards a crypto economy.

Then there are other categories of crypto; altcoins and stablecoins.

This blog post is dedicated to the latter category today.

Let’s dive into it.

What Are Stablecoins?

With volatility rife in the crypto market, stablecoins offer the stability that other digital currencies cannot.

Unlike other cryptocurrencies, stablecoins (prominent among them Tether, USD Coin, and Binance USD) are pegged against an underlying currency that accommodates easy exchange of digital assets.

How Do Stablecoins Work?

As discussed earlier, stablecoins are designed in such a way that they peg against one underlying fiat currency. In most cases, it is the US dollar or a commodity.

This is done to ward off the volatility factor of the crypto market and maintain price stability.

If you are an investor, stablecoins offer ease in crypto trading by getting around the volatility. Consequently, this promotes improved liquidity in the crypto economy.

In other words, you roll with the punches that volatility throws at you.

The Recent Jolt

Stablecoins – as its name says – are pitched as a stable form of virtual currency because they are pegged to a stable fiat currency.

But the recent crypto crash says otherwise. The recent tremor pummeled their credibility when Terra (LUNA) touched new lows in May this year.

The descent started when Luna network’s stablecoin, TerraUSD (UST), de-pegged from the U.S. dollar. It shed off almost 100 percent of its value within 24 hours.

This compelled many investors to aggressively sell off their Luna.

One might wonder after this episode, are stablecoins really stable anymore? Apparently, their stability does have some limitations.

Also read: Guide to know how Crypto Pump and Dump Scams Work?

The Effect of TerraUST Crash on the Market

UST is one of the biggest stablecoins. It got so widespread acceptance due to its decentralized finance activities.

Anchor, that outlines borrowing and lending protocols, allows its users to reap up to 18 percent of the annual yield – the highest in the crypto market.

When volatility sent shockwaves in the crypto market (caused by the de-pegging of UST to 1 dollar), Anchor responded by substantially reducing the yield percentage from 18 percent to 4 percent.

This resulted in countless exchanges refusing to deal with LUNA. This also weighed heavy on the Bitcoin price as The Luna Foundation Guard disposed of its Bitcoin reserves to steady UST.

The Investor Perception

After the recent debacle with stablecoins, investors are now wary of investing in stablecoins.

Many experts opine that it is extremely risky to invest in LUNA after a huge sharp drop in its value. Some say it might not make it back to its previous value at all.

The contemporary crisis with stablecoins taught many lessons. Fundamentally, stablecoins have structural challenges, and Bitcoin reserves alone cannot help maintain the stability of stablecoins.

Investors are now seriously wondering if stablecoins will ever be able to play their role in rendering much-needed liquidity to the crypto market.

Then there is another prevalent opinion. The UST crisis will bring other stablecoins into the spotlight i.e USDC and USDT and contribute to their growth.

It wouldn’t be wrong to say that when it comes to cryptocurrencies it is the survival of the fittest.

Investors need this confidence that their investment will not drown. This surety was somewhat offered by stablecoins amid the crypto market volatility. Not sure if stablecoins will ever regain their investors’ lost trust!

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