I’m going to begin by stating the obvious but bear with me.
Bitcoin and cryptocurrencies in general are volatile. It’s going to be this way until a wider adoption of cryptos is achieved.
Volatility is the result of a small market that is easily influenced by the movements of buyers and sellers.
As the market grows, prices stabilize and everything gets boring.
In the meantime, there are some cryptos that are designed to be the refuge from the storm.
(THE VIDEO WORKS!)
The key for pegged or tethered cryptocurrencies is the reserves that the crypto has of the other, more stable currency. So for USDT, also known as Tether for example, on their website you can see how much USD they have in their reserves. The amount in their reserves should closely match the amount of tokens they have in circulation. This is to ensure liquidity for their user base and therefore also ensure the value of their crypto.
For the sake of transparency they show their reserves on their website, however, whether this number is realistic or not is yet to be confirmed. But it seems at the very least they aren’t employing the tactics of fractional reserve banking.
In the past, Tether did experience illiquidity when the banks that they work with obstructed their ability to access fiat currency. This led to Tether dropping from their standard $1 per coin value down to around $0.93.
A lack of liquidity isn’t the only thing that can damage the price of pegged cryptos.
The thing about the free market is that if it is pushing for a certain price and a pegged crypto is meant to resist this price action, sooner or later the peg will fail and it can result in dramatic devaluations.
There are tokens that exist that are pegged in a way that doesn’t require them to have reserves of the actual fiat, or commodity. ## I’m talking specifically about BitUSD, the pegged cryptocurrency available on the Bitshares exchange.
BitUSD uses a pegging system unique to Bitshares that is also somewhat of a trademark for things built by Dan Larimer in that they are complicated to understand, yet they work.
If you’re interested in learning more about how Bitshare’s pegging system works check out the links down below.
Additional Reading/Sources:
What is a Currency Peg?
Tether Website
Tether FAQs
Bitshares Website
Bitshares' Pegging System Explained
The Merkle Article on Pegged Cryptos
CryptoInsider Article on History of Pegged Cryptos