Eye-watering price volatility is often the key factor that dominates news flow around cryptocurrency markets.
Massive surges and sharp losses, often with little or no direct cause, are par for the course when investing in cryptos like Bitcoin and the internet meme-inspired Dogecoin.
However, there exist a new breed of cryptocurrencies that have risen to prominence in recent years that are the polar opposite of this theme in that they strive to retain as stable a value as possible over time.
These are, perhaps unsurprisingly, named ‘stablecoins’, with a crypto called Tether being the largest with a market cap of around US$50.3bn, making it the fifth most valuable crypto on the market.
What is a stablecoin?
As the name suggests, stablecoins are cryptocurrencies that aim to keep their value consistent, allowing holders the peace of mind that their holdings will not suddenly rise or fall in value, in contrast to the dramatic price swings often seen for cryptos such as Bitcoin and Ethereum, which are treated more as speculative investments.
Stablecoins have a more reliable value as they are backed by equivalent amounts of other assets, be it fiat (or real-world) currency issued by central banks, other physical assets or even other cryptos.
Tether, for example, is pegged directly against the US dollar with a one to one ratio, meaning one Tether token is always worth one US dollar. The company behind Tether maintains the value of its crypto token by holding US dollars that are equal to the amount of Tether tokens issued.
Stablecoins aim to support the part of the crypto market often overlooked by the more speculative investment tokens such as Bitcoin, which is to serve as a stable source of value and as a medium of exchange that is faster and cheaper than traditional money transfers through banks.
Tether is also not the only stablecoin on the market, with available alternatives including USD Coin, another US dollar-backed stablecoin,
Why are stablecoins important?
Aside from the previously stated benefits, stablecoins such as Tether also help crypto to pursue the holy grail of the infant industry, mass adoption of digital currency by the mainstream public.
Individuals looking to take advantage of cryptocurrency’s low transaction costs and exchange speeds, for example, those sending money abroad, but don’t want to take the risk of their holdings suddenly changing in value, will be much more likely to consider stablecoins as a beneficial way to store and transfer their money.
Stablecoins offer something of a halfway house between pure cryptocurrency and traditional fiat money, in that they are often attached to the value of the latter much in a way currency pairs exist in ordinary forex markets.
While some criticise this model as preventing other cryptocurrencies from increasing in value, the peace of mind stablecoins offer may be the crucial factor in helping to bring cryptocurrencies into the public consciousness as something more than a speculative investment opportunity.
However, others will argue that the volatility is precisely the thing that has done the most to raise the profile of cryptocurrencies across the world, and it is those looking to make a quick buck in Bitcoin that are more important to the longevity of crypto than those looking for a safe space to park their cash in a digital wallet.