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Asset-Backed Digital Currencies: The Advantages and Concerns

Mon, 08 Mar 2021, 02:37 am UTC

Stablecoins are one of the more unique and intriguing digital assets in the cryptocurrency world. Some are pegged to fiat currencies like the U.S. Dollar. Others are underpinned by hard assets like diamonds and oil. Precious-metal backed stablecoins like GoldCoin is one of the fastest risers in the asset-backed crypto world.

Many like stablecoins due to their base asset, which helps the digital asset avoid the wild price swings and fluctuations often seen with other cryptocurrencies. Instead of being linked to a central bank or national government and at the will of authorities in those institutions (like fiat), stablecoins are governed by cryptography and not bound to a jurisdiction.

While cryptocurrencies backed by assets have many fans - they also have notable detractors.

Many in the crypto world remain skeptical of the asset in light of the controversy surrounding Tether in the last few years. Tether has run afoul of regulators, and rumors once swirled an appropriate amount of U.S. Dollars did not back the Tether stablecoin USDT.

Investors need to understand the advantages and disadvantages of asset-backed digital currencies as they decide to buy. These types of coins have many pros, depending on the risk tolerance of the investor, but also come with a few pitfalls.

Stablecoins: A Liquid Asset That Opens Up Diversification Opportunities

One of the biggest advantages of asset-backed cryptocurrencies is their efficiency and stability. Sending fiat currencies cross-border ensures the transaction’s value remains the same ($1 dollar will always equal $1), but high transaction fees and slow clearing times can pose trouble for those who need money quickly.

Sending cryptocurrencies like Bitcoin can be done in just a few seconds with relatively low transaction fees. However, the value of crypto can change in an instant, meaning a recipient could receive a smaller amount of money than originally sent.

Stablecoins allow people to send money cross-border without worrying about the value of their transaction changing due to the asset backing each coin.

Even better, asset-backed cryptocurrencies can be sent anywhere in the world with fees far lower than sending money through traditional financial institutions. As a result, stablecoins have become a well-used currency in places like Venezuela to counter massive hyperinflation in the nation. One city, Elorza, even went a step further and created its own currency to overcome cash shortages.

Stablecoins also open up immense investment possibilities into previously under-tapped or off-limits markets. The cost to purchase assets like bullion, diamonds, and oil can be out of reach for many prospective investors.

Asset-backed cryptocurrencies, many of which can be bought in fractional amounts, allow buyers to invest with any amount of money. This means for just a few dollars, a person could add a cryptocurrency to their portfolio pegged to a valuable asset.

Concerns About Manipulation And Centralization Still Remain

Market manipulation is one of the biggest concerns with stablecoins. Tether’s USDT ran into trouble as the company faced allegations of supply manipulation of its stablecoin.

Many asset-backed cryptos have highly centralized infrastructure as one company issues the virtual currency. This can pose a big problem to those who believe in digital currency as a decentralized financial asset that should remain free of central influence or control.

While some asset-backed cryptocurrencies engage with different models to assuage concerns about centralization, issues still remain. Crypto-collateralized coins are backed by other virtual currencies held in a basket. They are usually-over collateralized to try and mitigate risk as much as possible, but their instability is still an issue for many. Non-collateralized coins are governed by smart contracts to expand and contract.

These asset-backed coins are technically not backed by much of anything at all, leading some to worry about the control a smart contract might have over the crypto.

Opportunities To Buy And Sell Asset-Backed Cryptocurrencies

There are a number of advantages and disadvantages to asset-backed cryptocurrencies. These coins make it easy for investors to diversify portfolios and hedge against a volatile market. However, they come with risks of centralization and market manipulation due to their structure.

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