Stablecoins' Two-Edged Sword: Risk Reduction vs. New Dangers in Market Volatility
Swapping into stablecoins during a market downturn can reduce exposure to price fluctuations, but it also brings a different set of risks. A dollar-backed token like USDT should stay near its pegged value of one US dollar if Bitcoin or another asset falls in value.
The main benefit is lower short-term volatility, which can preserve buying power and make the situation feel less intense for traders. However, stablecoins are not cash in a protected bank account, and their value depends on the issuer, reserves, market confidence, and redemption process.
A reserve-backed stablecoin's dependability relies heavily on its structure, with cash and short-term government securities being easier to sell during heavy redemptions. Redemption rules also play a crucial role, as eligible customers can exchange one token for one actual dollar when the process is reliable.
The Bank for International Settlements has warned that stablecoin arrangements face run risk when reserves are insufficient or cannot be sold quickly enough to meet redemption requests. In March 2023, USDC temporarily traded below one dollar due to concerns over its reserves held at Silicon Valley Bank, showing that real reserves do not remove every risk.