Stable coins: A hedge against crypto volatility?
A stable coin is also a cryptocurrency, but its value is pegged to a relatively stable asset, like gold or a US dollar, and unlike bitcoin or ethereum
Banks and other Reserve Bank of India-regulated entities stopped servicing cryptocurrency exchanges last month, as per an RBI directive. But within a day or two, at least two cryptocurrency exchanges in India took the peer-to-peer trading route to enable crypto-rupee trading. Read here. P2P transactions, however, do not hedge you against price fluctuations, which can be significant in crypto markets, even in a short span.
In a regular transaction, where the exchanges are supported by the banking system, buying/selling a crypto asset is instant, and the price gets locked immediately.
However, in a P2P system, when a seller matches with a buyer and the transaction is initiated, the seller’s crypto asset is locked in an escrow. The buyer transfers the amount to the seller before getting the asset after due process. The actual transfer could take some time.
It is highly likely that the price of the crypto asset in question changes during that time. If the price depreciates, the buyer will be at a disadvantage, and vice-versa. Stable coins resolve this issue.
A stable coin is also a cryptocurrency, but its value is pegged to a relatively stable asset, like gold or a US dollar, or other assets easily available globally and does not fluctuate much, unlike cryptocurrencies like Bitcoin or Etherium that are highly volatile.
The companies launching stable coin maintain a reserve of the pegged asset. If a crypto company launches a stable coin pegged to the US dollar, it is expected to maintain a reserve of dollars in its publicly auditable accounts that is equal to the volume of the crypto issued.
In a P2P transaction, the seller can convert the crypto asset to a stable coin just before locking the value. So if the value is locked at $1,000, the buyer will transfer the amount and the value in terms of the stable coin as well as the rupee will remain the same for both the buyer and the seller. This gives the buyer an entry and the seller an exit at a known price point. Later, the buyer can use stable coin for crypto-to-crypto deals.
Indian exchanges offering P2P crypto-to-rupee trading are using stable coins pegged to the US dollar. Koinex is using a stable coin called TrueUSD, while WazirX is using USDT or Tether.
All stable coins have advantages and disadvantages, in terms of transparency of issuance or audits. Consider all the risks before investing.
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