Stablecoins are digital currencies pegged to a currency or asset (e.g. USD or gold). Like other cryptocurrencies, stablecoins have grown exponentially over the last two years, but not without controversies
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Tether, the largest stablecoin (with $60 billion worth of tokens), has seen its fair share of speculation. The most recent is an article where Bloomberg accuses Tether execs of fraudulently investing asset holders' money in high-risk assets and keeping the returns for themselves.
In response, a Tether spokesperson said Bloomberg's article is "snippets of old news" they've addressed in the past by publishing details of their asset pool.
A Stablecoin is... stable
Stablecoins are also typically less volatile than cryptocurrencies like Bitcoin and Ethereum because they're backed by real asset reserves. When a person buys a stablecoin, thereâs usually an equivalent held in reserves (e.g if you hold $1 of a USD-backed stablecoin, there is $1 reserved for you in their account).
Many people use them to:
- Bypass high transaction fees, as cross-border money transfers are typically faster and cheaper with cryptocurrency
- People in countries with high inflation rates use stablecoins as a way to hedge against currency devaluation
What's the deal with Tether? Experts believe that the confusion with Tether is the definition of 'backing'. When it launched in 2014, Tether was originally called backed exclusively by the dollar. In 2019, they added cash equivalents (like treasury bills and commercial paper) and returns from loans given by Tether to third parties â now only about 4% of Tether's value is backed by traditional currency.
Despite the changes, Tether still remains very stable. However, analysts believe that stablecoins that are are partly backed by cash equivalents and similar instruments, aren't very liquid and so are riskier than stablecoins ought to be. If you intend to hold stablecoins long-term, single asset-backed options (like USD Coin and Binance USD) might be worth exploring.