“Stablecoins as the name suggests are the class of cryptocurrencies that are backed by real assets and thus are pegged in the ratio 1:1 against the underlying assets. This stability can be used by the crypto investors as a hedge against inflation”.
What is Inflation and Why Fiat Currencies are Prone to Inflation?
Inflation is the decrease in the buying power of a currency and fiat currencies are the ones that are more prone to inflation. The fiat currencies are not backed by any physical assets and can be printed as many as the Government wants. As there is no capping on the supply of the fiat currencies, it leads to the diminished power of buying of the fiat currency as the number of notes circulating in the economy increases with time. For example, if a product can be bought for $100 note today, its cost will be inflated to $105 at a 5% inflation rate after a year as currency loses 5% buying power and is worth equal to $95.
What are Stablecoins and how can they be a Hedge Against inflation?
The stablecoins are the asset class within the crypto industry that are pegged in 1:1 ration against either a fiat currency such as US Dollar or against a commodity such as gold or silver or against a cryptographic algorithm. The pegging against a real asset makes the stablecoin’s price non-volatile and hence stable.
These stable coins are minted by the individual organization by keeping the fiat, commodity or crypto as a collateral in a ratio of 1:1 so that their price is stable all the time.
Hedge against Inflation
There are many reasons which make stablecoins to act as a hedge against inflation:
- Stable Price with Limited Supply: Other cryptocurrencies such as Bitcoin acts as a hedge against inflation due to their maximum supply capping, but the problem with the cryptocurrency is that they are extremely volatile and it is not possible to predict the price of the currency in the future and hence, at a particular time in future its price might be lower and thus its hedge will be compromised. The stablecoins on the other hand are backed by real assets as collateral, hence their price is stable and also, they can be minted in accordance to the collateral available thus putting a cap on circulating supply.
- Higher Interest Rate: Various exchanges are providing interest rates of above 10% annually on the staking or lending of stablecoins, thus beating the annual inflation rate by quite a margin. This makes the stablecoins an attractive option as a store of value that will grow an investment over time at a rate that will beat inflation and also provides protection to the investment due to extremely low volatility.
Disclaimer: The article is meant for the educational purpose only and in no way it should be considered as financial advice. Own research on the topic is advisable.
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