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How Stablecoins Could Fix the Issues With Cryptocurrencies

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Sep. 13 2021, Published 9:37 a.m. ET

Cryptocurrencies run on blockchain networks whose core function is to operate transparently and decentrally. Like most things, the cryptocurrency markets run in cycles, but volatility is constant. The volatility in cryptocurrencies creates a barrier between new investors experimenting with the technology. The persistent barrier leaves many people questioning if cryptocurrencies will ever stabilize.

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There are several key factors that can influence and ultimately impact the stabilization of cryptocurrency. Despite its overall volatility, the one type of cryptocurrency that can maintain its valuation is stablecoins. Stablecoins indicate that the currency is pegged to the dollar of the nation's currency, which makes it a comforting fact for many people who are new to crypto.

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The stablecoin model can provide a reliable store of value and medium of exchange.

It isn't uncommon to see a cryptocurrency rise and drop 10 percent in a 24-hour period with swings of magnitude that make it difficult to feel safe in investing. Cryptocurrencies are often associated more with speculative trading instruments like derivatives, which are attractive to speculators but impractical for mainstream use.

Since stablecoins are pegged to the dollar, the cryptocurrency retains the store of value and purchasing power. Ideally, the asset should experience the right amount of inflation where it would encourage investors to spend rather than store.

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However, stablecoins attempt to achieve this ideal behavior. Since cryptocurrencies are borderless and aren't governed by a central authority like a central bank, stable coins offer the best of both worlds. In this way, stablecoins have the security, anonymity, and decentralized features of cryptocurrencies except for the low volatility of a fiat currency.

Stablecoins can be an important catalyst to drive mass adoption.

While the SEC has been adamant about cracking down on crypto, stablecoins receive a lot of attention since they're popular in on-ramping onto crypto. There are also more applications that can benefit investors in utilizing stable coins like using them for trading goods and services over blockchain networks, derivatives contracts, and financial applications like consumer loans.

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Applications of this kind can't be made possible with other cryptocurrencies since the price tends to fluctuate greatly in a short amount of time. Stablecoins give users the security, comfort, and assurance of always knowing the value of the token without ever having to fully be at the mercy of market swings and cycles.

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Will Bitcoin ever stabilize?

In order for Bitcoin to ever stabilize, it would need significantly more liquidity in order to function as a viable form of currency. While the current total market cap has grown to nearly $$840 million, many merchants still don't accept Bitcoin as a form of payment.

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Since there are so many Bitcoins in relation to the number of people who want to invest or sell, the impact of those who do has a massive impact on the overall price. With less liquidity in the total pool, one trader can decide to sell a large portion of their holdings, which leads to a downward trend in price.

In order for cryptocurrencies to ever truly stabilize, they would have to exist solely as stablecoins or more liquidity would have to be injected into it. Until then, digital currencies still hold speculative value with immense potency on the market.

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