Stable Coin – Forex Academy

Introduction

We have learnt a lot about cryptocurrencies and their properties in our previous guides. Even though this financial instrument has gone through a lot of up & down in the last three years of the past decade, many financial experts believe that this asset class can still be considered a potential investment. Some experienced crypto traders believe that Bitcoin, at its peak (~$18,000 in Dec 2017), is still undervalued. This is because of the strong fundaments Bitcoin possesses. Not just Bitcoin, the entire crypto market has enormous investment potential in this decade.

The Need for Stable Coins

But there is one thing that concerns both short-term and long-term crypto investors – which is undoubtfully the volatility. Most of the cryptos currently present in the market possess huge volatility. This is one crucial reason why most of the investors are not confident enough to invest in this space. This volatility is also the reason why cryptos cannot be used as a standard medium of exchange. Hence the need for a Stable Currency or Stable Coin has risen.

A Stable Coin is a currency that has all the critical properties of typical crypto while achieving price stability. This stability in price is achieved by pegging their value to the major fiat currencies like USD & Euro in a 1:1 ratio. One of the very first and famous stable coins is Tether, and its value is pegged to USD. So the value of one Tether (₮) is always equal to one US Dollar ($). The main goal of any stable coin is to achieve maximum decentralization while maintaining price stability. But in the case of Tether, even though it has most of the properties of crypto, it is highly scrutinized ever since it is pegged with the USD.

Significance of Stable Currency

Stable Currency, as the name suggests, provides both short-term & long-term stability for the traders and investors. Short-term stability allows users to make day to day transactions just like fiat currencies. While the long-term stability provides confidence for the investors to include these stable coins in their portfolio. For instance, in the case of extreme bear markets, crypto traders and investors must need some stable storage where they can protect their portfolio from significant losses. The only other way is to convert all these cryptos to desired fiat currencies and convert back to crypto again once the downtrend is over. This sounds redundant. Isn’t it?

But with the help of stable coins in their portfolio, investors can just trade the cryptos that are bleeding for stable coins and hold them without having to worry about the volatility. Apart from the investment point of view, stable coins can also help short-term crypto traders to confidently keep their profits that they have gained within the exchange wallets (in the form of stable coins). But in the absence of stable coins, they will have to continuously worry about them losing their profit value due to the high volatility.

If you are interested in adding stable coins to your portfolio, we have mentioned some of the most promising ones below.

Tether | MakerDAO | True USD | Carbon

Many stable currency projects like these have come to existence after Tether, and some of them showed promising results. However, a completely decentralized stable coin that can be used for day-to-day transactions securely is yet to come.

Introduction

Tether is a cryptocurrency founded in 2015, and it was initially known as ‘Realcoin.’ Tether tokens are issued by Tether Limited, a company based in the British Virgin Islands as per the New York Times. The official website says the company is incorporated in Hong Kong, with offices in the US. This company is associated with the Bitfinex, a Hong Kong-based cryptocurrency exchange, which is also one of the biggest in the world. Many members who are on the board of Tether Limited are associated with Bitfinex exchange, as well.

Objective

The value of any cryptocurrency is volatile. We can see the steep increases and decreases in the value of any crypto within a matter of days or hours, as well. We know that these Cryptocurrencies offer a wide range of features that fiat currencies don’t assure. Therefore, Tether was designed as a stable coin promising the stability of fiat currency with the features of a cryptocurrency as well. Tether is meant to be backed one for one by some of the major fiat currencies like USD, Euro, JPY, etc. If we take the example of USD, the value of each Tether is always one dollar (USDT). For every one tether created, one US dollar is stored as a reserve.

Importance of Tether in the crypto world

Many crypto exchanges across the globe find it extremely difficult to work with traditional banks. The exchanges find it challenging to store USD or any conventional fiat currency as reserves for the payments. Hence major crypto exchanges like Bitfinex hold clients balance in Tether rather than in USD. This means, if the clients hold any money in the exchange and don’t have any open positions, that money is held as Tether in the exchange. It is converted into USD only when the client wants to redeem the cash. Hence Tether offers to be a stable alternative for USD for the crypto exchanges across the world.

Market Cap

Tether is in the fifth position in terms of market cap in the crypto world with a value of more than $4 billion. The price of each Tether is stable and is one dollar or Euro, etc. as described above. The average 24-hour trading volume is just above $43 billion, while the circulating supply is around $4.1 billion in the market as on 1st Nov 2019.

Controversies

Tether has a fair share of controversies in its kitty. As the central banks hold the appropriate amount of gold reserves equivalent to the new currency issued in the market, Tether Limited holds the equivalent amount of US Dollars in its reserve for the Tether coins circulated in the market. Lately, there are claims that the company doesn’t hold enough reserves in USD, claiming Tether Ltd haven’t been too transparent with the audits as to where and how much of the reserves have been stored in different places.

The December 2017 Bitcoin price surge is also attributed to be the work of the Tether limited. It is alleged that the company has created Tether coins out of thin air and bought Bitcoin at a lower price, eventually attributing the price surge of the currency. Thus, there are growing fears in the crypto market that if there are no adequate reserves of USD backing the Tether, the value of the coin should be determined by the market rather than maintaining it stable. Despite all these controversies, this cryptocurrency is still one of the most traded ones in the crypto space because of its stability factor.