If you’ve been keeping up with Facebook’s long-awaited foray into the world of cryptocurrency, you’ve likely come across the term ‘Stablecoin’.
But if you’re relatively new to crypto investing, you probably have no idea what that is. Let’s break it down.
What are Stablecoins?
Contrary to what the name might suggest, this is not a coin used to gain access to exclusive horse-riding clubs.
No, Stablecoins are a type of cryptocurrency whereby the value of the crypto is tied to other, more stable assets - hence the name Stablecoin.
Well, investors like the returns of cryptocurrencies like Bitcoin and Ethereum, but they don’t love the volatility that comes with it. Stablecoins tackle big price fluctuations by pegging themselves to assets like the US dollar or other government-issued currencies we use on a day-to-day basis.
These currencies are very stable (again, hence the name), because they’re regulated by authorities like central banks or reserves. They’re also not correlated to movements on cryptocurrency markets, so when Bitcoin drops, your Stablecoin is likely to remain solid.
How do Stablecoins work?
According to CoinDesk, the entity behind a Stablecoin will usually set up a “reserve”, where it stores the asset - or assets - backing the Stablecoin. For example, this could just be a bank account that holds $1 million backing up 1 million units of Stablecoin.
So when a user wants to cash out of their Stablecoin, an equal amount of whichever asset backs the Stablecoin is taken from the reserve.
However, Stablecoins don’t need to always be linked to currencies - they can also be linked to precious metals like gold or silver, or other investments altogether.
Also read: What does crypto have to do with NFTs?
Also read: 3 simple steps to buy crypto in Australia
What does this have to do with Facebook?
In 2019, Facebook flagged it was going where no social media platform had gone before, and creating its own cryptocurrency.
The platform, along with 26 other organisations formed the Libra Association, and planned to launch a self-titled crypto called Libra. It was set to be backed by a basket of fiat (government-issued) currencies and securities.
Earlier this year however, Facebook revealed some significant changes to its plans.
First, the Libra Association became the Diem Association, and the cryptocurrency itself became Diem. As in carpé diem - or seize the day. Freedom was clearly a theme.
What’s more, the Diem Association will be launching two sets of cryptocurrency coins: a stablecoin, and a multi-currency coin. The former will have a US dollar or Euro value, while the latter will be backed by multiple currencies, and can be used for global payments.
The coins would be backed by cash, cash equivalents and government securities.
Where can I buy Stablecoins?
Most crypto wallets (apps or sites where you can buy, sell and hold crypto) will sell some kind of Stablecoin.
However, like all investments, you’ll need to do your own research into which Stablecoin is right for you. Resources like CoinDesk and TheBlockCrypto.com can provide some good insights into crypto investments.