Cryptocurrencies seeking stability: stablecoins and CBDCs

The cryptocurrency market is often characterised by high volatility, which can often be risky for investors.

Stability-oriented cryptocurrencies, such as stablecoins and central bank digital currencies (CBDCs), are tools to manage this volatility.

Stablecoins

Cryptocurrencies whose value is tied to a stable asset or group of assets. This is usually a traditional currency (such as the US dollar), a precious metal (such as gold), or even a basket of other cryptocurrencies.

The aim of stablecoins is to combine the advantages of blockchain technology, such as fast transactions and decentralised operation, with the characteristics of stable currencies, such as price stability. Popular examples of stablecoins are Tether (USDT), USD Coin (USDC), and DAI.

CBDCs, or digital currencies of central banks, are another type of cryptocurrency that seeks stability.

CDBC

These digital assets are issued and managed directly by central banks.

They are often pegged to the national currency at a 1:1 ratio, meaning that a digital dollar, for example, is always worth the same as a traditional physical dollar.

CBDCs are essentially a digital version of traditional money and their use is expected to grow in the future.

Stablecoins and CBDCs can be very useful in managing the volatility of the cryptocurrency market.

Investors often use these instruments to reduce the risk of volatility or to take advantage of certain trends in the market. It is important to note, however, that while these instruments may appear stable, there are still risks that investors need to consider.