The Difference Between Cryptocurrencies and Stable Coins/National Treasuries Consider Issuing Stable Digital Currencies

Cryptocurrencies are subject to significant fluctuations in market value. Cryptos, such as Bitcoin, have suffered extremely large declines in value from time to time, although the long-term trend through recent years was a substantial climb in value.

Some “stablecoins,” in contrast, are theoretically backed by a reserve asset that acts as collateral, such as dollar-denominated bonds or currency accounts, and should therefore be relatively stable in value. The idea is that they should be able to be utilized in financial transactions and payments without concerns about swings in their value. Tether is an example of a stablecoin. However, investors and payees need to be aware that not all stablecoins are equal in nature, and some are actually backed, at least to some extent, by baskets of cryptocurrencies—which are not at all stable in value. It gets worse. Some stablecoins are actually just based on computer code (algorithmic) that is supposed to keep the system at a level value. Infamously, the TerraUSD stablecoin proved to be not stable at all when fell by 82% in one 24-hour period during May 2022. The somewhat related cryptotoken, Luna, fell from more than $60 to less than one cent over a very short period as well.

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