What are stablecoins, the asset rocking the cryptocurrency market? - BusinessWorld Online

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As cryptocurrency prices plummeted this week, with bitcoin losing around a third of its value in just eight days, stablecoins were supposed to be isolated from the chaos.

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But an unexpected collapse in the fourth-largest stablecoin TerraUSD, which broke from its 1:1 dollar peg, has brought the asset class under renewed attention.Stablecoins are cryptocurrencies designed to be protected from the wild volatility that makes it difficult to use digital assets for payments or as a store of value.

But they have surged in popularity in recent years. The largest stablecoin, Tether, has a market cap of around $80 billion, having surged from just $4.1 billion at the start of 2020.While data on the specific uses of stablecoins is hard to come by, they play a crucial role for cryptocurrency traders, allowing them to hedge against spikes in bitcoin’s price or to store idle cash without transferring it back into fiat currency.

Major stablecoins such as Tether, USD Coin, and Binance USD are reserve-backed: they say that they hold enough dollar-denominated assets to maintain an exchange rate of 1:1.Asset-backed stablecoins have come under pressure in recent years to be transparent about what is in their reserves and whether they have sufficient dollars to back up all the digital coins in circulation.

 

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