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crypto-basics

What is a Stablecoin?

Matthew Levy
Matthew Levy

Stablecoins are cryptocurrencies whose values are tied to other assets like fiat currency, other cryptocurrencies, precious metals and algorithmic functions.¹ Stablecoins "attempt to bridge the gap between fiat currencies and cryptocurrencies"¹ and are inherently built to withstand volatility and considered to be less volatile than other cryptocurrencies.

Types of Stablecoins

While cryptos offer a decentralized payment option, price volatility has been a  deterrent for cryptos being used in day-to-day transactions. To try and tackle this problem, stablecoins were created. Stablecoins can be classified² as:

  1. Fiat-backed stablecoins: The value of the stablecoin is backed by a suitable amount of the currency that is being pegged. Other options like gold and crude oil also come under this category.
  2. Crypto-backed stablecoins: As an alternative to regular fiat, cryptos have also been used to collateralize stablecoins.
  3. Algo-backed stablecoins: These coins are not backed up by any asset, but include a working mechanism to retain a stable price.

Although stablecoins are not regulated, they aim to offer astable option to carry out a transaction through crypto. However, they have recently come under scrutiny from regulators since they aim to provide a replacement to the fiat that central banks control.³

Example

Tether (USDT) is a “blockchain-based cryptocurrency whose tokens in circulation are backed by an equivalent amount of U.S. dollars, making it a stablecoin with a price pegged to USD $1.”⁴

Sources

1. Stablecoin Definition: What Are They and How Do They Work? NerdWallet.

2. Stablecoin. Investopedia.

3. New Crypto Concern: Stablecoins Under Scrutiny From U.S. Regulators. Cheddar.

4. Tether (USDT) Definition. Investopedia.


Please note that this article is for general informational purposes only. The example above is for illustrative purposes only. The views and opinions expressed are those of the author and do not reflect or represent the views and opinions of Alpaca. Alpaca does not recommend any specific cryptocurrencies.

Cryptocurrency is highly speculative in nature, involves a high degree of risks, such as volatile market price swings, market manipulation, flash crashes, and cybersecurity risks. Cryptocurrency is not regulated or is lightly regulated in most countries. Cryptocurrency trading can lead to large, immediate and permanent loss of financial value. You should have appropriate knowledge and experience before engaging in cryptocurrency trading. For additional information, please click here.

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crypto-basics

Matthew Levy

Matthew Levy is a Chartered Financial Analyst (CFA) designation holder, a former portfolio manager for $600+ MM in assets, and started his own business writing financial analysis for clients worldwide