Stablecoins are highly useful cryptocurrencies. They differ from regular cryptos, however, in that they have their value pegged to that of another real-world commodity, like gold or fiat.
This means that the value of a stablecoin neither goes up nor down.
Making them perfect for use in market crashes like the one the global crypto market is currently in.
The dominance chart of Tether USD for example has been observed to be in an ascending channel since mid-August.
It is currently testing the 7.25% level and is likely to break out upwards towards the 8% level in the next coming days, as shown below.
It is no surprise that the volume of stablecoins in use has reached an all-time high in recent times.
As was the case in August 2022, stablecoin volume almost hit the $1 trillion mark after growing almost exponentially in use over the last two years, as indicated by coinmetrics.
Why The Increase In Price For Stablecoins?
Stablecoins, in the beginning, were mostly used as “safe havens.” A way for investors to escape the effects of the market’s high volatility.
Investors could easily convert their assets into stablecoins and avoid the disaster that comes with market crashes.
However, the growing popularity of Defi and its applications have influenced the use cases of stablecoins and, therefore, their adoption.
In this line, several crypto firms have started to embrace stablecoins in a bid to stay afloat in the highly competitive market. Binance, for example, has announced that it may remove stablecoins that compete with its Binance dollar (BUSD). As of September 29th, the crypto platform plans to convert users’ USD coin (USDC), Pax Dollar (USDP), and True USD (TUSD) holdings into BUSD.
There are a few financial concerns with the adoption and use of stablecoins at the scale it is currently approaching. These concerns were brought to light, especially after the Terra Ecosystem crash in May 2022.
Following the FTX collapse, the Tron network’s algorithmic stablecoin Decentralized USD (USDD), backed by Justin Sun, plunged from its $1 anchor. Precisely, the stablecoin fell to as low as 97 cents on multiple crypto exchanges after it departed from a supposed 1:1 exchange rate with the U.S. dollar.
Problems With This Stablecoin Popularity
Stablecoins are private in some ways. BUSD, for example, is exclusive to Binance, and USDP is exclusive to Paxos.
The Terra ecosystem crash of May 2022 is one of the most devastating crashes in crypto history. The loss of its stablecoin peg has been linked to mismanagement by officials at the company.
For instance, the massive adoption of a stablecoin exclusive to some platforms could be highly devastating if the Terra ecosystem scenario happens again.
It is also not a secret that the use of stablecoins to power transactions is being explored by some governments worldwide.
For example, the Russian ministry of finance has shown interest in legalizing stablecoin transactions throughout Russia.
The Russian government believes stablecoins minimize risk and work better than traditional e-transactions.
Disclaimer: The author’s comments and recommendations are solely for educational and informative purposes. They do not represent any financial or investment advice. Always DYOR (do your own research).
