With cryptocurrency being a craze amongst the young investor, one is often left with a question; Whether cryptocurrency can take the place of fiat currencies?!

Let’s understand what a fiat currency is. A fiat currency is a legal tender that is backed by the government. However, it is not backed by any physical commodity like gold or silver. Just like the dollar, the Indian rupee is also a fiat currency that is backed by a Government decree. The RBI (Reserve Bank of India) regulates the printing of money and controls its circulation.

What are stablecoins?

These cryptocurrencies are pegged to fiat currencies or different commodities like gold. For example, Tether or USDT is a popular stablecoin. Since it is backed up by a currency it is considered less volatile as compared to other cryptocurrencies in the market.

Another way by which stablecoins achieve stability is through an algorithmic mechanism. Here, instead of pegging the coin to a fiat currency they are regulated mathematically, keeping in view the supply and demand. Terra or UST is one such stablecoin that uses smart contract-based algorithms to stay at a price of $1.

Can stablecoins be used to minimize risk?

Stablecoins are relatively less volatile and are stable as compared to other cryptocurrencies like Bitcoin and Ethereum. As an investor, one seeks to minimize the risk while investing.

Any investment made in Bitcoin or other cryptocurrencies is full of high risk because of its volatility. They can swindle too high or too low on any given day. For example, In January Bitcoin plunged to the $30,000 mark which was considered its lowest low. However, on March 28, it showed a bullish trend and peaked beyond the $45,000 mark.

Even though stablecoins aren’t risk-free but they do not fluctuate wildly. To minimize the risk in a crypto portfolio, one can consider introducing these coins. For example, if the price of Bitcoin plunges, the presence of USDT will help act as a safe haven. The idea is to diversify by introducing stablecoins in the portfolio.

Conclusion

No cryptocurrency is risk-free. The investor is required to do in-depth research before making an investment. However, just like diversification is key to minimizing risk in stocks or mutual funds, stablecoins can be used to lessen the volatility and hedge against the potential high risk that cryptocurrency has.

If you have any suggestions or wish to add your input, please leave your comments in the comments section.

Read more about – Understanding Crypto As A Novice


Disclaimer: Please note that the information provided in this article is for informational purposes only and should not be construed as investment advice. Investing in financial markets involves risk, and individuals should carefully consider their own financial situation and consult with a professional advisor before making any investment decisions. The author and the publisher of this article do not accept any liability for any loss or damage caused by reliance on the information provided herein.