The crypto crashes have not affected Bitcoin and major altcoins alone. They are having a negative impact on Stablecoins too. This is evident in the way that the market cap has plunged so deeply. In May 2022, it was $181 billion. Now, it is $156.8 billion. Furthermore, de-pegging has been going on steadily, over the last few weeks. Victims include Frax, Tether, USDT, Neutrino, etc. furthermore you can find out the different types of bitcoin wallet to manage your crypto volatility.
According to IDEG, a crypto digital asset manager, the Stablecoin market capitalization moves in alignment with the liquidity and sentiment witnessed in cryptocurrency marketplaces. Therefore, Celsius’ action of freezing transfers and withdrawals between accounts, had an impact. Similarly, the wiping out of TerraUSD, the Stablecoin, also influenced the behavior of crypto and Stablecoin marketplaces. Finally, there was the tightening of monetary conditions across the world, leading to apprehensions amongst investors.
Facts about Stablecoins
What are Stablecoins?
They refer to crypto tokens, which are pegged to the values of mainstream assets. These assets are Euros, the U.S. dollar, etc. They are less volatile, in comparison to digital currencies. Therefore, they prove useful for transferring funds across virtual tokens, or for converting them into cash.
Stablecoins become the targets of funds that arbitrage between diverse geographical locations and cryptocurrency exchanges. At present, the Stablecoins arena has lost over $5 billion in market capitalization, thanks to all the worries linked to crypto crashes and several Stablecoins being pegged out.
It is not only Tether that has taken a hit. There are other algorithmic Stablecoins also. These Stablecoins opt for complex mechanisms that assist in taking control of the supply of tokens and maintaining their respective pegs. For instance, Tron’s smart contract platform favors USDD. This Stablecoin stands 9th in the list of Stablecoins by market capitalization. It pegged out of the U.S. dollar, going as low as $0.96, at one time. However, Justin Sun, Tron’s founder, has announced that the company would utilize $2 billion to support USDD’s peg. Similarly, the manager of reserves for this Stablecoin, Tron DAO, declared that 2.5 billion Tron tokens would be removed from the Binance digital currency exchange, for bolstering USDD’s worth.
The positive aspect on the horizon is USD. This Stablecoin has the support of U.S. Treasury notes and reserves of cash. Therefore, its market cap is moving upwards. It has already gone from $52 billion to $54 billion within the span of a month.
Benefits of Stablecoins for Cryptocurrencies
Mainstream digital currencies consider Stablecoins a blessing! Since they are prone to drastic price fluctuations, it becomes difficult to utilize them for real transactions. Thus, Stablecoins take over and resolve tricky situations. To illustrate, Ether and BTC are known to be terribly volatile. Therefore, affixing prices in alignment with their terms is not easy. If Stablecoins enter the picture, they lock these prevailing prices to a familiar reserve currency.
Furthermore, Stablecoins have fixed prices. As their name suggests, they maintain stability. Therefore, it becomes possible to utilize them as functional currencies within a digital currency brokerage. For instance, it is possible to exchange Bitcoin for Tether, a Stablecoin, instead of going in for conversion into dollars.
Even banks do not remain open 24 x 7. Additionally, they are closed during weekends and holidays. However, Stablecoins are available throughout the year, 24 x 7.
It is possible to connect smart contracts and Stablecoins. Smart contracts are akin to electronic contracts. They go into automatic execution mode if all the terms of the contract are fulfilled.
Since Stablecoins are stable, it becomes possible to resolve disagreements that may show up when highly volatile digital currencies enter the picture.
Stablecoins Display Some Disadvantages Too
Like everything else, Stablecoins carry their own risks.
Backing by Reserves
Stablecoins need support from reserves. They keep their values intact. Here, they refer to the currencies that they are pegged to and known to everyone. If they are missing, it is hard for investors to opt for Stablecoins with full confidence. Therefore, de-pegging comes as a shock to them!
Strong Security Measures
It is important to store Stablecoins in a safe place. This could be a cryptocurrency exchange, the investor’s digital wallet, or a broker. However, it is necessary to check the security measures employed by the concerned trading platform, before trusting it.