What are stablecoins? Everything investors need to know

Alongside surging interests in bitcoin (BTC-USD) and the crypto space on 2024 highs, it may be confusing to understand all the terminology that comes with it. One of the top terms heard on Wall Street with crypto is stablecoin, which is a cryptocurrency with a value that is tied to that of another currency, commodity, or financial instrument.

Yahoo Finance Anchor Bradley Smith breaks down the term and everything you need to know about stablecoins

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This post was written by Nicholas Jacobino

Video transcript

BRADLEY SMITH: While the crypto world is abuzz with the talk of the upcoming Bitcoin halving, let's take a brief reprieve here and discuss another side of crypto one less susceptible to price swings and volatility. Stablecoins. Stablecoins are a type of digital token designed to carry a fixed value, and because of that they're less susceptible to volatility because they are backed by another asset, the fixed value, in theory, is a ballast against dramatic day-to-day fluctuations like those seen in Bitcoin and Ethereum. There are four main types of stablecoins, though, that you need to know about. Fiat-backed, crypto-backed, commodity-backed, and algorithmic. The most utilized type of stablecoin is Fiat-backed, such as finance.

For those stablecoins, an entity issues an amount of coins representative of an actual amount of currency that they hold. For example, 100 million coins backed by $100 million. Investors would then be able to use their new coins to exchange with other blockchain-based assets. And those who already own cryptocurrencies could convert their holdings into stablecoins, which would be redeemed for Fiat currency. Now regulators, they've been debating for years the best way to place guardrails around stablecoins within the financial system, especially after the failures of algorithmic stablecoins in the space, such as the 2022 de-peg and collapse of Terra, which wiped out $50 billion in total crypto valuation according to the National Bureau of Economic Research.