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.
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.
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.