What Is a Pegged Cryptocurrency, and How to Use Them

Cryptocurrencies are extremely volatile, and while that makes them great for achieving gains quickly, it also makes them not so great in some other areas. If you’re looking to preserve capital, it can be hard to do so in the crypto space, they don’t tend to do well as a stable store of value.

Likewise, if you’re trying to create something free of fluctuations with which to make a purchase, they falter here as well. Due to the nature of these assets and their often low circulating supplies, they are often subject to violent price swings which can give everyday people and merchants trying to accept them a heart attack on a regular basis.

This can also be troublesome to traders looking to stow away some of their hard earned gains. To that end, pegged cryptocurrencies have come into existence in order to ease some of this burden on the space and its inhabitants.

What is a pegged cryptocurrency?

A pegged cryptocurrency is a cryptocurrency asset that’s value is pegged to something else in order to create a stable currency. In many cases, this peg is tied to the US dollar, but there are other options available as well. Each of these solutions has their own merits or shortcomings, and it will be up to the individual investor to choose which one is the best for their specific situation.

What’s so special about a pegged currency? Well, a stable currency must be backed up with what it’s pegged to. That means that if your currency is pegged to the US Dollar, then that also means that you must have an equal number of US dollars in reserve in order to preserve that backing. It’s not enough to simply say a currency is worth one US dollar. It must be physically present, and it must be auditable as well.

A good peg currency will be transparent with their reserves and will allow their users to see that these funds are available, and they will also hopefully be subjected to third-party audits of their financials to verify that these numbers are indeed true. This is very important to maintaining the integrity of a peg currency.

Why would you want to use a pegged cryptocurrency?

To new investors, it might seem strange to want a cryptocurrency that acts like a fiat currency. Isn’t that what cryptocurrency enthusiasts are avoiding? While it’s true that many people are in cryptocurrency for the massive gains that can be achieved, eventually you do want to get off the roller coaster and take a break.

Investors looking for a place to store their capital that is free from major price fluctuations often turn to these pegged currencies in order to do so. Let’s say that you recently achieved a great return on one of your cryptocurrencies, but you were afraid of those gains evaporating overnight.

You could trade those gains for a cryptocurrency such as USDT, and then your capital would be secure, without the constant price fluctuations inherent in even a larger cryptocurrency such as Bitcoin or Ethereum. If you sense an upcoming dip this could be a good way to pull some money off the table for safe keeping.

This opens up additional possibilities for you for trading as well. Should the market experience the previously mentioned dip, your peg currency’s value will remain intact. Since it is already a cryptocurrency, and it has not exited the market into a fiat currency, that means you can quickly swoop in to capitalize on that dip and make a purchase, growing the number of coins or tokens in your portfolio. This is likely the most useful aspect of a stable cryptocurrency and what most investors are interested in using them for.

Potential problems with pegged currencies

The problem with stable currencies is that it’s actually pretty hard to maintain a constant dollar value. While there are many solutions to this issue, none of them have managed to be unwavering in price, and some of them like Steemit’s Steem Back Dollar have outright failed, never actually even returning to their pegged value.

Many investors are also skeptical as to whether some of these assets really have any funds in reserve or if they just have claimed to do so. It can sometimes be hard to verify the authenticity of these claims, and that leaves many with a lot of questions regarding these assets. If the integrity of these currencies fails, then your money is no longer safe here.

Popular pegged cryptocurrencies

There are a number of stable currencies available, and they all are better or worse for certain purposes. Below we’ll go over a few of these options and their pros and cons. If you choose to utilize a stable cryptocurrency, you should research its price history to see how good it is at actually being a pegged asset, because some of them are surprisingly lacking in this department. Their availability will also be a concern because a good currency with no adoption is simply not useful.

US Dollar Tether (USDT)

This is likely the most popular asset of this type. The USDT is pegged to the US dollar, and they invite users to view their asset balances in their transparency page. This allows you to see the amount of US dollars they have on hand to back up their token at any time.

USDT also has partnerships with many different companies including ShapeShift, Bittrex, and Poloniex which makes them the most widely available stable currency option. They’ve also done a fairly good job in holding their stable coin value, with only a short deviation from their target price.

Some investors do take issue with this currency due to its controversial history, and the fact that they continue to “print” tethers which some don’t believe they have the currency to back up. This is in part due to the fact that they have not revealed any auditing authority for their transparency accounts, and they do not offer any assurances that tokens will be redeemed for money.

Steem Backed Dollar (SBD)

The Steemit social media platform actually has two currencies, Steem and Steem Backed Dollars. Users who post on the platform are rewarded with both. Steem is used to power up the account for future rewards, but the SBD is meant to be a stable asset which users can then spend to purchase goods or service.

Each SBD is backed by exactly one US dollar worth of Steem. The details behind how all of this works are rather mysterious and many who have analyzed the white paper still don’t understand it.

There is one other problem with Steem Backed Dollars though. They are horrible for stability. Likely due to the much lower circulating supply of SBD to Steem, the coin was manipulated on the market, causing it to rise exponentially.

The coin never again dropped back to its tether price, and it seems no one really cares to fix it since it’s beneficial to the users. However, a coin that can’t hold its peg can go down too, and that should be worrying to anyone who’s actually looking to utilize a stable currency.

TrueUSD (TUSD)

TrueUSD is a stable coin meant to compete with USDT, and they’re doing a pretty good job of sticking to their peg for the most part. Interestingly, this company actually funds its users by utilizing a legal escrow scheme.

This allows them to provide investors access to a stable coin without the company ever touching the funds. Instead, a trusted third party manages this. A smart contract ensures that there is always an equal 1:1 accounting of tokens and USD between the escrow.

They also offer the legal protections that USDT seems to lack, offering purchasers the ability to always trade their tokens for US dollars, with full account transparency and frequent third-party audits.

While they have an excellent product, there are only a few exchanges which allow you to trade using this asset, and that means they have some catching up to do if they want to overtake Tether. However, they do have a very attractive offering.

Conclusion

In closing, there are many circumstances where it may make sense to hold some of your funds in a stable asset, and if you don’t want the hassle of exporting to your native fiat currency, then a pegged option could be the way to go. This not only gives you excellent capital protection, but it also gives you buying options in down markets.

Keep in mind that this is by no means an extensive list, and there are many other similar currencies out there that you might want to explore for yourself. Even decentralized exchanges can have them such as Bitshare’s BitUSD, this gives even the most private of cryptocurrency investors an option to limit their volatility exposure without cashing out to fiat. You can think of these currencies as just another tool to be utilized in your arsenal to make you a better trader and to protect your assets.