Crypto Winter was a frightening experience and a convincing demonstration of the ugly side of Market Volatility. During that time, from the peak of December 2017 to the lows of December 2018, we can clearly see that Bitcoin lost approximately 80% of its value – a nail-biting experience for any investor with a low risk tolerance and not blessed with Diamond Hands”. XRP, Ethereum, and many other digital assets also lost a sizable percentage of their Market Capitalization.
Stablecoins, Cryptocurrencies that aim to maintain a Stable, unchanging value through various means, provide safe havens to investors and a proven method for those who wish to remain exposed to such downtrends and volatility.
There are four types of Stablecoins: 1. Stablecoins backed by Fiat 2. Stablecoins backed by Commodities, 3. Stablecoins backed by other cryptocurrencies, 4. Algorithmic Stablecoins.
The biggest challenge for any stablecoin is to maintain its peg. But why do Stablecoins deviate from their peg in the first place? It has to do with Market Dynamics. Stablecoins are often used as Safe Haven currencies. Investors flock to them in turbulent times, causing, through increased demand, the stablecoins to momentarily lose their pegs. When the price of Bitcoin crashed in January of 2018, USDT averaged a premium of 5 cents! Investors frantically liquidated Bitcoin positions and purchased USDT. Stablecoins also lose their pegs when the underlying currencies experience bouts of volatility.
Some of the most popular Stablecoins on the market today include:
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