This can make it inconvenient and inefficient for crypto investors looking to trade in and out of crypto. Using stablecoins as a trading pair for more volatile tokens like bitcoin can be a more efficient option for traders. A stablecoin is a cryptocurrency whose value is “pegged” (meaning tied) to another asset—often a traditional fiat currency like the US dollar. For example, one unit of a stablecoin that’s pegged to the US dollar should always be worth $1. For instance, a stablecoin issuer may promise to hold $1 in a bank account for each of the cryptocurrency coins it creates. As long as the collateral (or reserves) are available, coin holders know that they’ll be able to exchange a coin for $1.
What Are Stablecoins and How Do You Use Them?
- Of these, gold is generally the most popular commodity used as collateral for commodity-backed stablecoins.
- Over the past month, investors have seen around a 4% daily change in the value of BTC.
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- Intraday swings also can be wild; the cryptocurrency often moves more than 10% in the span of a few hours.
- But to borrow DAI, users must lock cryptocurrency into a smart contract called a collateralized debt protocol (CDP) via the MakerDAO ecosystem.
“The HKMA will review how reserve assets will be or are proposed to be managed, as part of the license application assessment process,” the Hong Kong regulator noted in its conclusions. Adding that the government and the financial regulators are exploring regulatory approaches for activities, such as the storage of private keys. Peter Brewin, partner at PwC Hong Kong and greater China, said that having HKMA-regulated stablecoin issuers will “totally change the market”.
Types of stablecoin collateral
- This is called “overcollateralization,” which attempts to smooth out some volatility.
- Each CACHE is backed by 1g of pure gold held in the vaults stored around the world.
- First, you might want to keep money in the cryptocurrency system, but you don’t think it makes sense to invest in bitcoin (or a different cryptocurrency) right now.
- If a stablecoin loses its intended value and is unable to quickly recover it, it becomes functionally useless.
- At a market cap of $66.9 billion, USDT is currently the third biggest cryptocurrency, behind Bitcoin and Ethereum (ETH).
- For example, one unit of a stablecoin that’s pegged to the US dollar should always be worth $1.
Stablecoins, and cryptocurrencies, are now under increased scrutiny by federal regulators. USDC’s reserves are held in safe assets that should retain their value, such as cash and U.S Treasurys. Here’s a general guide to understanding the different stablecoins available on the market today. USD Coin is a https://www.tokenexus.com/ stablecoin launched jointly by cryptocurrency firms Circle and Coinbase in 2018 through the Centre Consortium. In places such as Dubai, virtual asset custody services are incorporated as one of the regulated activities as part of the licensing regime under its Virtual Assets Regulatory Authority (VARA).
Should you invest in stablecoins?
These stablecoins are centralized, which parts of the crypto community may see as a drawback, but it also protects them from crypto volatility. Gold has long been seen as a hedge against stock market volatility and inflation, making it an attractive addition to portfolios in fluctuating markets. Digix is a stablecoin backed by gold that gives investors the ability to invest in the precious metal without what is a stablecoin the difficulties of transporting and storing it. A stablecoin is a cryptocurrency whose value is pegged to the price of another asset, hence the term “stable.” For example, if functioning correctly a stablecoin pegged to the U.S. dollar should always be valued at $1. On August 7, 2023, payments giant PayPal announced they were issuing their own stablecoin pegged to the U.S. dollar, PayPal USD (PYUSD).
He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. The HKMA may pursue criminal proceedings against FRS issuers who are violating the offense provisions within the proposed legislation. The involvement of a third-party custodian is crucial for virtual asset security, according to Rex Zhang, chief operating officer at digital insurer OneInfinity by OneDegree. When it comes to custody of virtual assets, FA reported late last year that fragmentation exists.
- Tether (USDT) and TrueUSD (TUSD) are popular stablecoins backed by U.S. dollar reserves and denominated at parity to the dollar.
- Remember that the crypto world can be unpredictable, as 2022’s TerraUSD collapse showed.
- A “stablecoin” is a type of cryptocurrency whose value is pegged to another asset class, such as a fiat currency or gold, to stabilize its price.
- How many tokens you own will change, but they will still reflect your share.