Why in the news?
- Stabecoins are exploding in popularity because they are a practical and cheap way to transact in cryptocurrency mainly in US markets.
- Stablecoins have moved from virtual nonexistence to a more than $120 billion market in a few short years, with the bulk of that growth in the past 12 months.
What is a stablecoin?
- A stablecoin (stable value coin) is a type of cryptocurrency that is typically pegged/identified to an existing government-backed currency.
- To promise holders that every $1 they put in will remain worth $1, stablecoins hold a bundle of assets in reserve, usually short-term securities such as cash, government debt or commercial paper.
- Stablecoins are useful because they allow people to transact more seamlessly in cryptocurrencies that function as investments, such as Bitcoin. They form a bridge between old-world money and new-world crypto.
- But many stablecoins are backed by types of short-term debt that are prone to bouts of illiquidity, meaning that they can become hard or impossible to trade during times of trouble.
- Despite that somewhat shaky backing, the stablecoins themselves promise to function like perfectly safe holdings.
Stablecoin Vs Bitcoin:
- Stablecoin is a type of cryptocurrency that has a non-volatility price and Bitcoin is a cryptocurrency whose price is volatile in nature.
- The concept of stablecoins is introduced only to minimize the price volatility of Bitcoins.
- Bitcoin is one of the most popular cryptocurrencies whose price rises and falls simultaneously which makes traders wait for the right time to exchange their Bitcoins. Stablecoins whose value is merely equal to any fiat currency and doesn’t change accordingly helps in the exchange of them anytime by the stablecoins.