Why stable coins are not the solution to cryptocurrency volatility

Why stable coins are not the solution to cryptocurrency volatility

Why stable coins are not the solution to cryptocurrency volatility

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Conventional cryptocurrencies such as Bitcoin are getting famous for many things, specially because of their unpredictable fluctuations which make them unreliable and risky. Stable cryptocurrencies, the latest trend in the crypto market, aim to solve these problems. Being backed by conventional financial units, they are attractive as value deposits and less prone to financial speculation.

But this does not mean that they are the solution to the instability of the crypto markets, to know why, let’s learn a little more about the variants of stable cryptocurrencies.

Completely collateralized

In this type of stable cryptocurrency, the issuer has reserves that equal or exceed the value of the cryptocurrencies in circulation. Tether is a great example of this type of product, since it’s linked one by one with the dollar.

The most obvious downside of this cryptocurrency is the expenses incurred per crypto unit: to issue a Tether dollar value the platform must attract a dollar of capital and store it in a bank account, in dollars. The question here would be: why would someone change a perfectly liquid dollar backed by the government, for a cryptocurrency with questionable stability?

Partially collateralized

In this type of stable coin, the platform that emits the cryptocurrency has partial funds to back

the value of the cryptocurrencies in circulation. The problem with this type of cryptocurrency is to link the exchange rate with a reserve that represents only a fraction of its liabilities. The biggest problem with this variant of cryptocurrency is that if investors trust enough collateral securities they will probably sell their cryptocurrencies, and that in the short and medium term will drop their value.

Not collateralized

The third type of stable cryptocurrency is not collateralized at all. Here, the platform emits not only cryptocurrencies but also cryptobonds. If the price of the coins begins to fall, the platform buys them, in exchange for additional bonuses. In theorythe bonds will attract investors who trade at a discount, which in principle would contribute to raising the price. In addition to this, the attractiveness of the bonds are the interests that the issuers promise in the form of more cryptocurrencies. These interests are financed with the income obtained from the future issuance of currencies.

The cryptocurrency market is even more unpredictable than any financial stock market that has ever existed. And although they are a new financial product with almost unlimited growth potential and applications, their instability is one of their biggest problems. The introduction of new options such as stable cryptocurrencies are a step in the right direction but they are far from being the solution to instability and volatility.

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