Stablecoins and stability
A Stablecoins is a cryptocurrency that is designed to minimize price volatility. They can thus be easily depended on as stores of value, or be used in cases where people don’t want to trade volatile cryptocurrencies.
One of the key ways in which a Stablecoin is made stable is by pegging it to fiat currency. This is the case with Tether, the first cryptocurrency that is supposedly backed by the US dollar. However, Tether witnessed an astonishing drop in its pegging last month, with value coming down to as low as $0.86.
This prompted Santiment to analyze the stability of stablecoins in an effort to find out just how suspect they were to price volatility, and they have now published their findings.
The objective of the analysis was to try and discover what caused the unprecedented swing in Tether price. It used a number of the more prominent Stablecoins in the market today as samples. That list includes, but was not limited to-
- USD Coin
- Paxos Standard Token
- Gemini Dollar
- CK USD
The first part of the study was based on standard deviation, which expresses how much members of a group differ from the mean value for the group. This led to the discovery that Tether was ”the least volatile stablecoin of 2018, deviating less than 0.5% – or less than half a cent – from the mean on a daily basis.”
The study then went on to probe more deeply into the matter, using linear regression models to discover what causes this volatility in the first place. Here, they discovered that the trading price of stablecoins are significantly impacted by changes in daily trading volume. Further analysis showed that Stablecoin, including Tether, is not immune to general market volatility either.
Not so stable after all
Santiment's study proves that price volatility does exist in Stablecoin: it can react to general market gains and falls, as well as changes in daily trading volume. This leaves investors with a lot more to ponder on, as they try to find the balance between volatile cryptocurrency and its more stable counterparts.