At its basic level, a pegged value crypto asset is a cryptocurrency whose price is pegged to another asset. In other words, the value of the cryptocurrency doesn’t fluctuate as wildly as other cryptocurrencies do. It’s more stable. And if you want to do stable cryptocurrency trading, then use bitcoin up. This can be great for investors who want more certainty in their investments and don’t want to deal with the high volatility of many cryptocurrencies.
What are pegged value crypto assets?
Pegged value crypto assets are cryptocurrencies that have a fixed price. This means they aren’t as volatile as other cryptocurrencies, making them an attractive option for businesses looking to make transactions more stable. In addition, they can be pegged to the value of other currencies, such as the US dollar or gold.
Some examples of pegged value crypto assets include:
- Basecoin – A cryptocurrency that is linked to US dollars.
- USD Coin – A cryptocurrency that is linked to the US dollar.
How do pegged value crypto assets work?
These crypto assets are created as a token on a blockchain, but they are not mined like other cryptocurrencies. Instead of mining new tokens, the supply of pegged-value crypto assets is controlled by the issuer or foundation that created them.
The issuer typically uses collateral to back up their tokens; this collateral is held in an escrow account. At the same time, the linked central bank currency is held in another account at the same institution. It can fix the value of each token against either fiat currencies (like USD/EUR) or other cryptocurrencies (such as BTC/ETH).
To maintain the peg in place, pegged value crypto asset issuers will have to take out loans from banks using their fiat currency reserves as collateral for that loan. So when someone wants to buy a token from an issuer using bitcoin, for example, there must be enough bitcoin available for them to purchase it. After paying back their loan, there must be enough fiat currency reserves must be left over.
Different types of pegged value crypto assets
The most common type of pegged value crypto asset is stablecoins. These are cryptocurrencies whose values are stabilized by a significant party and backed by a fiat currency in the real world, such as the US dollar or euro. Some examples include Tether (USDT), TrueUSD (TUSD), and Gemini Dollar (GUSD).
Another popular form of pegged value crypto assets is fiat-backed tokens. Similar to stablecoins, except they’re not tied to any particular government currency but represent their own blockchain-based “virtual” money instead. An example would be Dai from MakerDAO and ether rather than USDT backs that.
What pegged value crypto assets mean for investors
For investors, pegged value crypto assets provide a way to invest in cryptocurrency without worrying about the risks associated with volatility. The relative stability of these assets means they can act as a hedge against the risk of investing in cryptocurrency. In addition, pegged value cryptocurrencies offer an easy way into this market for those interested in getting exposure to crypto assets but don’t want to deal with all their complexities or risks.
Pegged value crypto assets aren’t like average cryptocurrencies. They have a fixed exchange rate for fiat currency, meaning they don’t experience the same volatility as other cryptocurrencies. And while you can use them in the same way as regular cryptocurrency, pegged value crypto assets are backed by real-world assets.
As a result, they are often used instead of fiat currencies in certain situations. For example, one country recently announced plans to introduce a government-backed digital currency pegged 1:1 with its national currency. This makes it easier for citizens to transact online without having their wealth tied up in volatile cryptocurrency markets.
As you can see, pegged value crypto assets are a bit different from traditional cryptocurrencies. In contrast, they are decentralized and censorship-resistant, like other types of blockchain-based tokens. They also have unique characteristics that make them stand out among other tokens. When you understand these attributes, it becomes easier to understand why people might want to invest in them or use them for payment.