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Stablecoins – A Risk Mitigation Tool or a Fraudulent Cryptocurrency

Stablecoins are digital currencies that are created to be pegged to more secure assets, thus making them less volatile than the rest of the crypto world. They are also believed to be a constant and a compulsory part of the developing decentralized financial market. One of their main advantages is that investors can trade their volatile cryptocurrencies for stablecoins to retain the nominal amount behind their investment.

The crypto world is typically uncertain as one day you may feel on cloud nine watching your account going up by hundreds or even thousands of percent. At the same time, the very next day, you might lose that upper momentum and suffer additional losses to your initial investment. At that point, you will most certainly wish that you have exchanged your crypto for fiat currency.

Stablecoins provide us with such an exact feature that you can exchange everything for a digital currency like Tether (USDT) that is supposed to be pegged to the US dollar. Hence, its value remains at a fixed exchange rate to the dollar and tends to move only by small portions. Through this procedure, the investor can feel slightly more secure since they have managed to mitigate the risk of the decentralized market.

Stablecoins also allow us to move funds between exchanges quicker compared to fiat currencies regulated by the bank. Also, crypto transactions might be cheaper than the transactions we tend to make daily when we purchase something online or pay our rent or utility bills with a bank card.

The problem with stablecoins might occur because some skeptical people might think that the price of Tether (USDT) isn't worth one US dollar. Then, its price might stumble and eventually crash if people start selling it due to increased uncertainty levels. However, so far, nothing seems to be a red light for investors and regulators, but this might change in the future since the stablecoins are mainly backed by commercial paper and not by cash. Therefore, we will need further proof of the reserves that are behind each coin.