Top 5 things to know about stablecoins

Tom Merritt shares the most important information you need to remember about stablecoin cryptocurrencies.

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You may have heard of stablecoins and thought it sounded like a good idea. After all, most cryptocurrencies are quite volatile, so why not have one meant to be stable?

You may also have heard of stablecoins crashing and wondered: Well, how did that happen? I thought they were supposed to be stable?

Here are five things to know about stablecoins:

  1. Stablecoins are often equated to U.S. dollars. Many stablecoins are tied to the U.S. dollar in such a way that the issuer promises to always exchange one coin for one dollar.
  2. Stablecoins can be backed by many things – not just U.S. dollars. Some stablecoins are tied to other stable reserves like gold. They might also be tied to an algorithm that manipulates the supply to keep it pegged at a particular value.
  3. Stablecoins don’t have to be backed by anything. There’s no regulation about what gets to be labeled a stablecoin. The Terra stablecoin was backed by another cryptocurrency called Luna which was tied to reserves of a lot of other cryptocurrencies. It was one that used an algorithm to try to hold its value. That algorithm eventually failed.
  4. Even stablecoins backed by dollars aren’t actually backed by dollars. A stablecoin called Tether uses a mix of corporate debt, cash and treasury bills. The idea is to have some holdings that can be liquidated fast when needed but also appreciate in value.
  5. Stablecoins are useful for money transfers. While Bitcoin can be relatively slow and Ethereum can have high fees, when stablecoins are actually stable, they can conduct transfers much faster and cheaper than the traditional banking system.

Just because it has stable in the name, doesn’t mean it’s entirely stable. Caveat emptor has never applied so well.

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