Cryptocurrencies

Bitcoin Magazine: The Risks of Stablecoins

The cryptocurrency market is having a strong year. Bitcoin, the sector’s leader by size, has had a triple-digit return. That’s beaten the returns on the stock market. And compared to the decline in the bond market, it stands out even more.

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  • Investors are looking to the space with a bullish eye. Several positive developments for cryptos are in the works, including the approval of a Bitcoin exchange-traded fund (ETF). That would make investing in cryptos easy, and also possible from tax-advantaged accounts.

    That’s leading interest in other cryptocurrencies as well. That even includes stablecoins, which are cryptos designed to trade at a 1-to-1 parity with the U.S. dollar.

    These coins offer a bridge between traditional finance and the real world. And they’re easier to accept as a store of value or payment as a result.

    However, stablecoins have some downsides.

    As with traditional money, there’s a central issuing authority that has to be trusted. Relying on a third party custodian could be dangerous, as has been seen in the past two years with the implosion of several cryptocurrency brokers.

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  • Plus, stablecoins have sometimes deviated from their parity levels, particularly during moments of market stress. Investors looking for stability may be better off in cash rather than a cryptocurrency that could lose its value at the worst time.

     

    To look at the full risks behind stablecoins, click here.