According to Bloomberg News, coins are the latest hot spot in the crypto market, and the prices are not moving. Stablecoins and cryptocurrencies that peg their value to the US dollar, have magnified in size over the last couple of months as coins and Bitcoin whipsaw.
The total market capitalization of stablecoin now stands at $150 billion. It reached $185 billion in April 2022, rising rapidly from $38 billion in early 2021. But it has fallen recently due to algorithmic stablecoin’s collapse and volatility of the crypto ecosystem in recent months.
The Rise of Stablecoin
As per James Malcolm of UBS, the rise in the market value implies that crypto traders are moving the assets to cash. The prices of Bitcoin have nosedived by as much as 50% since November mid, and smaller coins are recording an even greater decline.
There is anxiety among traders about how aggressive the Federal Reserve will be in tightening the monetary policy has caused upheavals in the risk assets, causing Bitcoin to tumble below $33,000 in the previous month. There has been a sideway trade of the coin since, and trading volumes have been shriveling up as well.
However, Bloomberg News reports this has been a boon for the stable coins. Tether is the largest stablecoin gaining share, and its total market cap is $67 billion. USD Coin is in the second position with $42 billion market cap and Binance USD in the third position with a market cap of $15 billion.
Stablecoins have maintained the fixed exchange rate by holding on to the reserves like Treasuries’ commercial paper. For this reason, the faster growth of stablecoins has attracted scrutiny from the Treasury Department and US regulators for risks associated with financial stability.
However, Bloomberg News reports that stablecoin’s usefulness in storing and transferring funds within the crypto ecosystem has triggered undebated growth.
Stablecoin Types
Stablecoin is of three types. Those are:-
- Fiat-backed stablecoins – keeps fiat currencies like USD in reserve.
- Crypto-backed stablecoins – works the same as fiat-backed stablecoins but uses cryptocurrencies as collateral instead of using real currencies.
- Algorithmic stablecoins – removes the necessity of reserves and manages the supply of issued tokens with algorithms and smart contracts.
Advantages of Stablecoins
- Usable for daily payments in shops, individuals, and businesses.
- Being blockchain-based, a stablecoin is usable for sending to anyone across the globe.
- Investors and traders use stablecoins to stabilize their investment portfolios and reduce risks.
Disadvantages of Stablecoins
- Maintaining the peg isn’t guaranteed in stablecoin, as the overall record isn’t good. Its peg can lose value drastically.
- Some stablecoins have transparency issues.
Closing Thoughts
Almost every wise investor today has invested in stablecoins at some time or another. Many traders use stablecoin to capitalize on new market scopes quickly. Although it has become a part of cryptocurrencies, you should always consider its risk factors before investing.
