Cryptocurrencies are extremely volatile, and while that makes them great for achieving gains quickly, it also makes them not so great in some other areas. If you’re looking to preserve capital, it can be hard to do so in the crypto space as they don’t tend to do well as a stable store of value.
To that end, pegged cryptocurrencies have come into existence in order to ease some of this burden on the space and its inhabitants. But, what is pegging currency meaning and how can they be used as a stable store of value? Let’s dive more into it:
Pegging Currency Meaning
The general idea of pegging a currency is where the price is designed to remain the same as a designated asset. For example: 1 USDT is pegged to 1 USD. Also referred to as a stablecoin.
A pegged cryptocurrency is a cryptocurrency asset whose value is pegged to somETHing else in order to create a stable currency. In many cases, this peg is tied to the US dollar, but there are many other options available as well. Each of these solutions has their own merits or shortcomings, and it will be up to the individual investor to choose which one is the most ideal for use based on their situation.
What’s so special about a pegged currency? Well, a stable currency must be backed with what it’s pegged to. That means that if your currency is pegged to the US Dollar, then it would mean that you must have an equal number of US dollars in reserve in order to preserve that backing. It’s not enough to simply say a currency is worth one US dollar since that US dollar must be physically present, and it must be auditable as well.
A reliable pegged currency will be transparent with their reserves and allow their users to see that these funds are readily available, and they will also hopefully be subjected to third-party audits of their financials to verify that these numbers are indeed true. Performing these audits are very important to maintaining the integrity of a pegged currency.
Why Use Pegged Cryptocurrencies?
To new investors, it might seem strange to want a cryptocurrency that acts like a fiat currency. Isn’t that what cryptocurrency enthusiasts are avoiding? While it’s true that many people are in cryptocurrency for the massive gains that can be achieved, eventually you do want to get off the roller coaster and take a break.
Investors looking for a place to store their capital that is free from major price fluctuations often turn to these pegged currencies in order to do so. Let’s say that you recently achieved a great return on one of your cryptocurrencies, but you are afraid of those gains evaporating overnight.
The solution could then be to trade those gains for a cryptocurrency such as USDT, and then your capital would be secure in the sense that it would be without the constant price fluctuations inherent in even a larger cryptocurrency such as Bitcoin or ETHereum. If you sense an upcoming dip, this could be a good way to pull some money off the table for safe keeping.
This opens up additional possibilities for you for trading as well. Should the market experience the previously mentioned dip, your peg currency’s value will remain intact. Since it is already a cryptocurrency, and it has not exited the market into a fiat currency, that means you can quickly swoop in to capitalize on that dip and make a purchase, growing the number of coins or tokens in your portfolio. This is likely the most useful aspect of a stable cryptocurrency and what most investors are interested in using them for.
Potential Problems With Pegged Cryptocurrencies
The problem with stable currencies is that it’s actually pretty hard to maintain a constant dollar value. While there are many solutions to this issue, none of them have managed to be unwavering in price, and some of them like Steemit’s Steem Backed Dollar have outright failed, never actually even returning to their pegged value.
Many investors are also skeptical as to whETHer some of these assets really have any funds in reserve or if they just have claimed to do so. It can sometimes be hard to verify the authenticity of these claims, and that leaves many with a lot of questions regarding these assets. If the integrity of these currencies fails, then your money is no longer safe here.
Closing Thoughts
In closing, there are many circumstances where it may make sense to hold some of your funds in a stable asset, such as if you don’t want the hassle of exporting to your native fiat currency, then a pegged option could be the way to go. This not only gives you excellent capital protection, but it also gives you buying options in down markets.
Hopefully with this article, you now know the pegging currency meaning, its use cases, and a few potential problems worth taking into consideration. From here, it’s up to you to explore more by conducting your own due diligence and possibly begin using them as a stable store of value for your portfolio!
