Crypto Winter was a frightening experience and a convincing demonstration of the ugly side of Market Volatility. During that time, from the peak of December 2017 to the lows of December 2018, we can clearly see that Bitcoin lost approximately 80% of its value – a nail-biting experience for any investor with a low risk tolerance and not blessed with Diamond Hands”. XRP, Ethereum, and many other digital assets also lost a sizable percentage of their Market Capitalization.
Stablecoins, Cryptocurrencies that aim to maintain a Stable, unchanging value through various means, provide safe havens to investors and a proven method for those who wish to remain exposed to such downtrends and volatility.
There are four types of Stablecoins: 1. Stablecoins backed by Fiat 2. Stablecoins backed by Commodities, 3. Stablecoins backed by other cryptocurrencies, 4. Algorithmic Stablecoins.
- Stablecoins backed by Fiat: this class of Stablecoins is backed by reserves of real currency which are held by regulated Custodians. These reserves guarantee the market value of the Stablecoins.
- Stablecoins backed by Commodities: Certain Stablecoins are backed by reserves of commodities such as Gold, Silver or Oil. This second class of Stablecoins is more susceptible to price movements.
- Stablecoins backed by Cryptocurrencies: These Stablecoins are backed by other cryptocurrencies, such as Ethereum.
- Algorithmic Stablecoins: this fourth class of Stablecoins is not backed by fiat currencies or by commodities. Their value is maintained by the minting or burning of tokens. If the Stablecoins’s price falls below a predefined threshold, an algorithm will immediately react and burn tokens in order to induce scarcity, bringing back the price above the predefined threshold.
The biggest challenge for any stablecoin is to maintain its peg. But why do Stablecoins deviate from their peg in the first place? It has to do with Market Dynamics. Stablecoins are often used as Safe Haven currencies. Investors flock to them in turbulent times, causing, through increased demand, the stablecoins to momentarily lose their pegs. When the price of Bitcoin crashed in January of 2018, USDT averaged a premium of 5 cents! Investors frantically liquidated Bitcoin positions and purchased USDT. Stablecoins also lose their pegs when the underlying currencies experience bouts of volatility.
Some of the most popular Stablecoins on the market today include:
- 1. Tether’s USDT: Tether, launched in November of 2014 as a Private Beta, is a cryptocurrency originally pegged to the US Dollar and more recently to a number of other currencies. Tether is the largest Stablecoin by market capitalization and the most traded cryptocurrency today.
- 2. USDC: USDC, a fully audited Stablecoin backed by real cash reserves, is the second largest Stablecoin after Tether’s USDT. There are currently 26.4 Billion dollars of USDC in circulation, and on-chain transfers have reached 832 billion dollars! USDC is regulated by financial institutions and redeemable at all times for US dollars.
- 3. DAI is an algorithmic Stablecoin. DAI is backed at all times through a dynamic system of over-collateralized debt positions, autonomous feedback mechanisms and incentives. DAI, launched in 2015, aims to maintain an exact ratio of one-to-one with the US dollar.
- 4. AUDT is a Stablecoin backed by the Australian dollar. This token, the brainchild of Chrono.Tech, a lively startup company based in Sydney, Australia, which is currently disrupting the worlds of Human Resources and Finance, is regulated and fully compliant with AUSTRAC, Australia’s financial intelligence agency. AUDT is designed to provide a Transparent, Stable on-chain store of value, which can be sent to a regular wallet and transferred easily. Chrono.Tech has stated that all Fiat Funds that back the value of AUDT are held in an account with a reputable and regulated Australian Bank.