Blockchain and cryptocurrencies have been on investors’ radars for some years. Bitcoin may have dominated a lot of the headlines until now – but there are many other types making their mark too. Stablecoins are one innovative category of cryptocurrency currently gaining traction across the world.
Any investor aiming to diversify their portfolio will want to research up-and-coming financial instruments. Below we explore what stablecoins are, the benefits they can offer to traders and how they’re now taking off in Asia.
What is a stablecoin?
A stablecoin is a class of cryptocurrencies rather than an individual instrument. They’ve been designed to balance some of the key benefits of cryptocurrencies – such as efficient processing, transparency and payment security – with the comparatively stable valuations of fiat currencies, i.e. those issued and backed by governments.
Their price stability is achieved by pegging their market value to a fiat currency or a commodity. The reserves that back strong fiat currencies such as the US dollar for example help to counteract the wild price swings that can occur with many well-known cryptocurrencies.
Without this same level of backing, bitcoin value has been known to be volatile from one hour to the next, a characteristic that deters the average investor from hedging their bets. Stablecoins however can bridge this gap and offer greater practicality.
What are the different types of stablecoin?
There is an ever-increasing number of stablecoins being released in different parts of the world. They can be broken down into three key types – fiat collateralised, crypto collateralised, and non-collateralised.
As discussed, fiat-collateralised stablecoins typically maintain a fiat currency as collateral to issue crypto coins. They can also be pegged to precious metals and commodities like gold and oil.
Crypto-collateralised stablecoins are backed by other cryptocurrencies. Because these reserves can be more volatile, a larger number of crypto tokens is maintained as a reserve for issuing a lower number of stablecoins.
Non-collateralised stablecoins are also known as algorithmic and use working mechanisms to maintain their price. A comparative example is a country’s central bank printing banknotes to maintain a fiat currency’s value.
Why are they becoming popular in Asia?
Stablecoins first emerged in the mid-2010s and many of the most popular have been pegged to the US dollar. More are now being created against other fiat currencies however, including the Euro, the Swiss Franc and an increasing number of Asian variants.
Examples include the THBEX, a stablecoin representing the Thai Baht, the IDK, pegged to the Indonesian Rupiah, and sparkdex.HKD, maintained against the Hong Kong Dollar. The PHX meanwhile is pegged to the Phillipino Peso.
One new option on the market is the XSGD stablecoin. Released in October of this year, the XSGD is one of the few tokens to be denominated by the Singapore Dollar, allowing Singapore investors to carry out crypto transactions backed by their national currency.
As one of the world’s leading business hubs, any Singapore-based cryptocurrency will be worth keeping a close eye on. For Asia and indeed the rest of the world, the future of stablecoins looks promising.