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What are stablecoins and why are governments so worried about them?

* This material is brought to you by Jaltech

by Jonty Sacks *

  • Stablecoins have become a popular form of cryptocurrency in recent years.
  • Stablecoins play an important role but do not have the return and risk profiles of the majority of cryptocurrencies.
  • From an investment point of view, stablecoins have a great use case.
  • CLICK HERE for information on Jaltech’s Cryptocurrency Basket

Stablecoin is a cryptocurrency where the underlying value is secured by a reserved asset, such as the US dollar, gold or other valuable assets. Stablecoins have become a popular form of cryptocurrency for market participants who use cryptocurrencies for business purposes as these digital assets are much less volatile than other types of cryptocurrencies.

Jonty Sacks

Admittedly Stablecoins, a much newer asset class than Bitcoin or Ether, have grown exponentially over the past 3 years, with the most prevalent being Tether (USDT), a US-backed cryptocurrency with a market capitalization of over $ 78 billion, followed by USDC market value over 37 billion US dollars.

Compared to traditional banking, stablecoin payments can be settled within minutes, 24 hours a day, 365 days a year, but traditional payments require anywhere from 24 – 72 hours to settle and are only available during business hours. When comparing transaction costs, stablecoins’ transaction fees are a small percentage of traditional bank charges.

Stablecoins do not have the return and risk profiles of the majority of cryptocurrencies on the market, but they do play an important role. Here are some examples of their use cases:

Payments

The cryptocurrency market is very volatile, as a result of which rapid price changes make it difficult for market participants to settle trades at a set price. For example, if you were to use Bitcoin to settle a transaction, the recipient of the transaction could receive less or more than what you owe, simply because of the large price fluctuations of the digital currency.

Stablecoins, on the other hand, are backed by physical assets that reduce volatility and enable users to control the risk of price fluctuations.

Dollar / physical asset risk:

Stablecoins give holders risk for physical assets such as foreign currency, gold and other commodities. Stablecoins offer a cost-effective way to take a risk on material assets without having to trade through traditional banks or other expensive intermediaries. Lower transaction costs, more accessibility and increased liquidity make stablecoins an attractive tool.

Keep the pattern

In times of volatility or uncertainty, investors sell out of their cryptocurrency position and transfer their value to stablecoins. They do this to protect their investment and limit exposure to price fluctuations. When conditions are favorable for the investor to return to the market, stablecoins can be seamlessly converted back into cryptocurrency,

From the government’s point of view, stablecoins are not formally recognized. The issuers of these currencies are not subject to the rules and regulations that apply to the formal banking sector (although this may change soon). The consequence could lead to mismanagement of investor capital, which would have negative consequences for the holders of stablecoins as well as a knock-on effect on the ecosystems in which they are used.

From an investment case perspective, although stablecoins have excellent use cases, investors looking for an asymmetric return format related to cryptocurrency investments would do well to assess the value proposition of cryptocurrencies outside of stablecoins, as the potential for high return on investment is limited.

  • Jonty Sacks – Partner at Jaltech

Jaltech offers investors exposure to the cryptocurrency market and has developed an cryptocurrency basket that offers investors a variety of exposures for various cryptocurrencies.

The basket provides investors with a managed cryptocurrency investment in which cryptocurrencies will be included or excluded from the basket based on market movements and developments. The incorporation or exclusion of cryptocurrency is assessed in accordance with clear criteria set by a team of Jaltech cryptocurrencies experts.

For information on Jaltech’s Cryptocurrency Cart, Click here.

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What are stablecoins and why are governments so worried about them?

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