Dealing with Volatility in Crypto Markets
“When it rains, it pours.” Originally used by the Morton Salt company in a 1914 ad campaign, the phrase describes a day that’s filled with bad luck.
It probably also describes how many crypto investors feel in this present period of high market volatility. In traditional finance (TradFi), one learns to weather periods of volatility by moving money into fixed-rate bonds and commodities such as gold.
But in the world of crypto, is there an equivalent to gold? Is there an easy way to weather downpours short of just cashing out and throwing up the white flag?
Short answer: yes :). And that answer is–stablecoins. Stablecoins have a fixed exchange rate with another asset as opposed to a floating exchange rate (the latter of which would make it susceptible to volatility).
But what actually are stablecoins? They are cryptocurrencies that attempt to “peg” their value to some other resource, commonly a fiat currency or a commodity, but there are actually four types of stablecoins in total:
- Fiat-collateralized stablecoins: Pegged to a major currency such as the US dollar or Euro, every fiat-backed stablecoin has real fiat currency in a bank account for backing it up and, at any point in type, holders of these stablecoins can exchange their holdings for an equivalent value of the fiat currency.
- Commodity-backed stablecoins: Pegged to precious metals such as gold and even to things like beef, oil, or real estate. Holders of commodity-backed stablecoins have (in both theory and in reality) ownership over tangible assets with real value.
- Crypto-backed stablecoins: While it might seem odd that stablecoins could be backed by other cryptocurrencies, crypto-backed stablecoins operate on the principle of over-collateralization, meaning that the collateral should be worth more than enough to absorb a reasonable amount of loss.
- Algorithmic stablecoins: Algorithmic stablecoins are non-collateralized and, honestly, you should just steer clear. We don’t list any algorithmic stablecoins on Bridges Exchange.
Stablecoins serve several important purposes for holders of cryptocurrency. As we’ve already discussed, stablecoins are a way to protect the value of your holdings during periods of market volatility. But, that’s not all…
Stablecoins can also be a great place to store value if you’re not actively trading and/or holding long-term on particular projects. For example, let’s say that you typically monitor the value of your crypto holdings on a regular basis, and that you strategically make swaps based on a steady stream of marketing inputs. BUT… next week you’re on vacation and you won’t be able to keep tabs on everything taking place. No problem–simply preserve the value you already have by swapping your holdings into a stablecoin for the duration of your trip.
Are you thinking about taking the plunge into the world of cryptocurrencies? Stablecoins help you de-risk your portfolio in the same way that bonds and commodities do in traditional finance. You can learn more about getting started (and even start trading today) by visiting the Bridges Knowledgebase at https://learn.bridges.exchange/.