In a market that is no stranger to volatility, sometimes stability is a much appreciated and needed asset. A cryptocurrency with a twist, stablecoins combine traditional asset stability with digital-asset what is a stablecoin flexibility. The value of most cryptocurrencies is largely determined by what the market will bear, and many people who buy them are doing so in hopes that they will increase in value.

This is consistent with large growth in new users, some but not all of which later churned. The data may indicate that interest rates drive the crypto market cap as a whole, which in turn drives active users, which in turn drive stablecoin balances. Of course, within this macrotrend there might be a strong correlation between interest rates and stablecoin balances simply because interest rate arbitrage is so reactive that it drives frequent small fluctuations. Regardless, the evidence certainly does not show that most stablecoins are used for interest rate arbitrage. Bitcoin (BTC), Ether (ETH), and other altcoins have historically been volatile. While this provides many opportunities for speculation, it does have drawbacks.

Fiat collateral-based Stablecoins

They aim to keep the value of stablecoins steady by tying them to something stable. They are both new forms of digital money that have the potential to be used to pay for things. Our rules would only apply to stablecoins that are widely used for payment in the UK. That is why we are working with other UK financial regulators and together we have proposed rules on stablecoins. For every stablecoin it issues, the company also holds the same value in a country’s currency. This is how the company links the value of its stablecoin to the value of something else.

• A stablecoin is a form of digital asset that can be used to make payments.
• All cryptocurrencies are are based on similar blockchain technology, which enables secure ownership of digital assets.
• Imagine buying a €500,000 house – with the relative cost in bitcoin constantly changing you’ll be glued to price charts desperately trying to time the transaction favourably.
• But due to the underlying collateral being in cryptocurrency, it is prone to more volatility.
• Crypto-native financial advisory firm Steakhouse Financial publishes a helpful dashboard on where stablecoins are held on the ethereum blockchain.
• Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues.

It’s common to have open governance mechanisms in crypto projects, meaning that users get a say in the development and running of each project. As such, you need to get involved or trust the developers and community to run the https://www.tokenexus.com/ project responsibly. While some large projects have a good track record, there have also been many projects that have failed. When a stablecoin has constant issues maintaining its peg, it can lose its value dramatically.

Stablecoins: What They Are, How They Work

People can use the PayPal app or website to buy, sell, hold, and transfer PYUSD2, along with other cryptocurrencies. Instead, it could be that the rise in stablecoin balances during the bull market was due to new users of the blockchain that were pulled in by the bull market. When interest rates rose, it popped the bubble, which in turn drove some recently onboarded users away. This in turn would drive down stablecoin balances and create the aforementioned correlation. The data seems to support this explanation, because balances increased more leading up to March 2022 than they decreased after CeFi interest rates rose.

Federal Reserve sets monetary policy publicly based on well-understood parameters, and its status as the issuer of legal tender does wonders for the credibility of that policy. To serve as a medium of exchange, a currency that’s not legal tender must remain relatively stable, assuring those who accept it that it will retain purchasing power in the short term. Among traditional fiat currencies, daily moves of even 1% in forex trading are relatively rare.