Last Updated on April 12, 2023 by cryptocreed
In the world of cryptocurrencies, volatility is the name of the game. In other words, the value of your investment can either go up or down over time, so winning or losing a significant amount of money is always a possibility, depending on when you enter and exit the market as an investor.
If only there was an alternative and you could hold crypto without taking on such risks… or is there? Well, we might have some good news for you!
Enter crypto pegging
In its simplest terms, crypto pegging refers to a certain crypto asset being tied to the value of another currency or asset. For example, Tether is a cryptocurrency the value of which is tied to the value of USD, the world’s most popular fiat currency.
Such cryptocurrencies still have all the other characteristics that make a cryptocurrency attractive, with the addition of having their value “pegged”, so all the risk of holding on is virtually eliminated (which, depending on your objectives, may be either a good or a bad thing).
A manufactured stability
A typical crypto asset is about as unstable as it gets. In 2021, Bitcoin reached its record-breaking height of $69.000. However, the market trend reversed afterward and we’ve been in a bear market ever since. This has discouraged many would-be investors from buying in because they are afraid that they could lose money by entering the market at the wrong time.
On the other hand, we have stablecoins, also known as pegged cryptocurrencies, that are completely immune to where the rest of the crypto market is headed, value-wise. They are, however, still linked to the value of an asset. If we take Tether as an example once more, although its value can stand on its own two legs amid crypto market volatility, it’s no good for the purposes of safeguarding against inflation. If your dollar dips in value, so will your USDT.
Cryptocurrencies can be pegged to all sorts of assets
We’ve already mentioned Tether (USDT) which has its value linked to USD. Since the ratio is 1:1, owning 100 USDT means you’d have the same kind of money as if you had $100 in your pocket. However, cryptos can be pegged to other commodities as well, including gold, silver, crude oil, and others.
We can place these stablecoins in the following categories:
– Crypto-backed stablecoins: the term refers to other cryptocurrencies that can be used as collateral for a stablecoin to maintain its value.
– Algorithmic stablecoins: there is an algorithm behind them that corrects the value of the coin if it goes out of whack (these crypto coins are not linked to other assets directly).
– Commodity-backed stablecoins: since their value is directly tied to the value of a certain commodity like gold and silver, it’s safe to think of them as virtual gold.
Can stablecoins be depegged?
Although this is seen as undesirable, it’s possible that a pegged crypto coin’s value deviates from its intended value. For instance, this could happen if the market rapidly spirals downwards. If your money invested in an algorithmic stablecoin, its value would unlink itself from how much it was intended to be worth.
Popular stablecoins
When talking about stablecoins, the following pegged cryptos tend to be popular among investors and crypto enthusiasts:
– Tether: a stablecoin that has its value pegged to the value of the US dollar. It was one of the first stablecoins in existence.
– Digix (DGX): a stablecoin that’s worth as much as 1 gram of gold.
– True USD (TUSD): a crypto token that rests on the ERC-20 network and can provide proof of funds in real time.
Source: Pixabay
Pegged cryptocurrencies have their value linked to real-world commodities like silver or gold.
Conclusion
In today’s short guide, we’ve given you the essentials of crypto pegging and how it affects the value of your investments. For those who are interested, additional information on the subject is available at the following link: https://learncrypto.com/blog/keep-learning/what-does-pegging-mean-in-crypto-how-pegged-crypto-works-and-related-risks
