What are Stablecoin Risks?

 

Stablecoin’ is a term used to describe a cryptocurrency that attempts to maintain a stable value by reference to an underlying asset, such as a fiat currency, commodity, or other cryptocurrency. 

Different types of stablecoins use different methods to attempt to maintain a stable value but regardless of the method used, the value of a stablecoin may fluctuate–often referred to as ‘depegging’--which could result in a loss to any holder of a stablecoin. 

A common method for attempting to stabilise the value of a stablecoin is for a stablecoin issuer to maintain a reserve of assets. In this scenario, if the value of a reserve is lower than the value of the issued stablecoins, that stablecoin’s value may depeg. Some other stablecoins use an algorithm to try to maintain a stable value. For these kinds of stablecoins, any bugs or issues with the algorithm could cause a stablecoin to depeg.

Many stablecoins are denominated in the US dollar, so you may be exposed to fluctuations in the exchange rate between the US dollar and pound sterling.

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