Updated: Jul 13
In Part 2 of our guide to the Crypto.com app, you might have seen that we mentioned something called stablecoins when we talked about their Crypto Credit feature. And now you’re probably wondering what stablecoins are and what makes them so special in the world of cryptocurrency.
The first thing you have to remember is the definition of cryptocurrency. From our article, you will see that it is a digital currency not backed by anything that we say has value.
Now let’s compare this to the US dollar – which is a fiat currency. Back when USD was first created, it was backed by gold and silver. This has changed over the years and it is now backed by the perceived power of the country that “created” it and is controlled by the Federal Reserve. They decide how much currency gets minted/printed. But if people lose faith in that country for some reason – the value drops.
For the most part, this system works really well, and fiat currencies see only small fluctuations in their value over time. Unfortunately, cryptocurrencies don’t enjoy this same stability. Because they work with perceived value and nothing but that, their value can change drastically in a very short period. An example of this is Bitcoin, which is the original cryptocurrency and the most well-known. You would assume that this means its value wouldn’t change too much, wouldn't you?
You’d be wrong though!
As you can see in the graph below, Bitcoin’s value climbed to $10,367.53 in February of this year, and only one month later was worth just $4,944.70. It has improved since then, but that huge drop means that quite a few BTC owners took a hefty financial knock. And there is no way to know if they’ll ever recover those losses.
Such extreme fluctuations in the market are the reason many are wary of investing in cryptocurrency and accepting it as payment for whatever goods and services they may offer – because these wild fluctuations can occur in a single day. On top of that, it’s hard to be sure a cryptocurrency isn’t going to just…disappear one day, such as what happened with Pincoin in 2018.
But what many do love is the instant processing and security of cryptocurrencies. So how to combine the instant processing and payment security that cryptocurrencies give with the much less volatile fluctuations in value that fiat currencies provide?
What Exactly Are Stablecoins?
Stablecoins are a cryptocurrency because they are created digitally and are based on blockchain technology. The first two things that make them different is the fact that there is not a limited supply of a stablecoin (such as with BTC) or a fixed schedule for creating/disbursing them. The biggest difference though is the fact that they are backed by some sort of collateral.
Tying a digital and therefore effectively intangible cryptocurrency to something tangible can give token holders peace of mind because they know the price of their token is as stable as the value of the specific collateral it is tied to. Should the worst happen, cashing out quickly is easier because they know what exactly their crypto wallet is worth in terms of a known fiat currency – and so does anyone they exchange them with.
This system sounds pretty simple, but it is actually a little complicated. This is because there is a third-party custodian who is responsible for storing and managing the associated asset. And no matter how trusted they are, this centralized third party seems to bring the whole decentralized spirit of blockchain technology into question.
Some platforms have responded by ensuring that they operate with complete transparency, sharing everything from audits to daily financial records with their users, while others have been accused of multiple types of impropriety and yet consistently manage to perform incredibly well. With cryptocurrency and the blockchain still being a relatively new technology – and stablecoins even more so – no one really knows exactly how the system can and can’t be manipulated.
What form this collateral takes and how each stablecoin keeps its value in line with the asset or fiat currency they are tied to varies by the specific stablecoin. but here are a few of them.
This is the most popular kind of stablecoin and it is backed with a fiat currency, usually at a