Converting To Stablecoins In Dips And Crashes – A Good Idea?

However, as we witnessed several times in 2021, market volatility can take things the other way around and cause severe price drops. If we only look at Bitcoin’s main crashes this year, the one in mid-May was the most devastating, causing the coin’s price to go from $60k to $30k by the time the correction was done and the price started to recover.

Then, in mid-November, just after the coin reached a new ATH, its price fell again, this time the resistance level at $68,000, sending BTC down to $45k. And there were plenty of smaller crashes along the way.

So, what do people do when it happens? They seek refuge in stablecoins, as they have for several years now. The question we want to ask today, however, is whether this is a good idea or not.

What are Stablecoins?

Before we start discussing whether converting coins to stablecoins during dips and crashes is a good idea, let’s briefly cover what stablecoins are.

As the name suggests, stablecoins are stable cryptocurrencies whose price is immune to regular cryptocurrency volatility. This can be achieved through several means, with the most popular method being the use of a real-world asset to back the minted coins. For example, if a project mints 100 million stablecoins, it needs to back them up with equal worth in real-world assets.

Most projects choose to use USD or another fiat currency to back their stablecoins, where a single coin would be equal to $1. This is the case with most major stablecoins, including Tether (USDT), USD Coin (USDC), Binance USD (BUSD), and others.

It is also possible to lock up a specific amount of a certain asset — be it gold, oil, fiat currency, or even another crypto — and then modify the circulating supply of the stablecoin in order to match the value of $1 per coin. There are several such approaches, to ensure that the stablecoin will keep the stability of its price, and not have it go either above or below the price of $1.

In ensuring that the stablecoin’s price remains fixed, those who have issued it are also ensuring that the crypto community will always have a stable digital currency to turn to in bearish times, when the prices of regular coins — those that so often provide great earning opportunities — start crashing down, whether due to their natural market cycle, or because of some news or development that may have had an impact on the market sentiment, which then extended to the coin’s value.

Is it a Good Idea to Convert Your Crypto to Stablecoins?

So, now that you know what stablecoins are, what they do, and how can they be used — is it a good idea to use them?

Only a few short years ago, many would say no, as stablecoins were relatively new back then, and many were skeptical about their ability to preserve value. There were also issues and controversies, such as Tether’s refusal to provide insight into its bank accounts and confirm that it can truly back all of the coins that it minted with the appropriate amount of USD. However, since then, plenty of more transparent stablecoins have emerged, and they have become a part of the crypto industry.

So, if you notice that the crypto prices are falling, or you expect that a crash might follow soon, converting your cryptos into stablecoins can, indeed, preserve your wealth. It often happens that the demand slightly impacts the price of stablecoins, but they correct themselves and return to $1 before long, so a bit of patience is all it takes for the price to correct itself.

A bigger issue, however, might not lie with stablecoins, but with the USD itself. As one of the world’s biggest and strongest fiat currencies, USD is typically used to determine the value of stablecoins. But, due to COVID-19, the US has been printing more money in order to help its people back when many were forced to stay at home, or even lost their jobs due to the pandemic.

This has led many experts to develop strong concerns regarding the future of the USD, and fear potential upcoming inflation. In fact, this fear is what pushed people towards gold and Bitcoin in the first place, and it resulted in a recovery of the crypto market which started almost immediately after it originally crashed in March 2020.

So, if the stablecoins are backed by USD, and the USD starts losing its value, then your wealth in the form of stablecoins might also be at risk.

Conclusion

For the time being, there are no certainties regarding the future of USD or stablecoins themselves. As long as the dollar remains strong, stablecoins should remain a reliable way to preserve your wealth if you convert the coins when the dips and crashes start in the rest of the crypto industry.

But, given the potential for the USD to lose its value due to the events that took place over the last 2 years, it is certainly recommended to not blindly trust in the stablecoins’ ability to protect your funds, but to keep a watchful eye on what is going on with them, as well as the USD itself.

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