If you need to send dollars or euros abroad to circumvent sanctions, do not rush to buy coins. The crypto market is dangerous for those who have never worked on it. We analyze the details of the toffee strategy for transferring real money using cryptocurrency.
Cryptocurrency Market Risk – Investor Panic
A current example is the panic among cryptocurrency traders. Since May 9, they have been selling their assets and trying to convert electronic money into traditional currencies. In particular, because investors are not sure that stable coins remain pegged to the real dollar, since the rate of one of the most stable and popular of them – Tether (ticker USDT), began to fall against the US currency. At the moment, instead of one dollar, the coin cost 95 cents. Another coin – Terries (ticker UST), instead of the dollar began to cost 20 cents.
Instability of a conditionally stable coin
Due to such fluctuations in the rate of stable coins, investors and participants in the cryptocurrency market found out that their stability is conditional. Their savings converted into these coins fell by 5% in USTD and 80% in UST.
Due to the influx of those wishing to urgently transfer their money into traditional currencies, the Binance crypto exchange temporarily suspended the withdrawal of funds from UST and its sister cryptocurrency Terrilyn. The latter, being an alternative to bitcoin, was used to support the price of UST.
If at the beginning of April it was bought at $115, on May 10 the coin was already trading at the level of $30, on May 11 its rate at some point practically zeroed against the dollar. On the morning of May 13, the coin was trading at a price of just over a dollar. According to the American CNBC, the injections of billions of dollars that the funds associated with this cryptocurrency spent on maintaining liquidity affected.
The exact reasons that caused the collapse in the cryptocurrency market are unknown. According to the Investing.com resource, the trigger could be a fraudulent scheme of several funds working with cryptocurrency. They could create a situation to destabilize the UST rate and capitalize on its fall. Thus, the divergence of the dollar and stable coin rates could be caused artificially. And then the very fact that the stable coin fell in price provoked a panic among the holders of crypto assets.
Cryptocurrency transfers: why are they so popular
After imposing sanctions on Russian banks and retaliatory restrictions by the Central Bank, Russians who need to travel abroad, buy something in another country or withdraw their money from Russia, found themselves in a quandary.
It is impossible to cash out the currency purchased after March 9 in banks or on the stock exchange. It is also impossible to transfer or transfer across the border more than 10 thousand dollars in a legal way. Many financial bloggers, advisors and services are actively promoting these coins. What’s the catch here?
Blockchain, cryptocurrencies and stable coins
More than 10 thousand cryptocurrencies are circulating in the world today, and most of them work on the basis of blockchain technology. In fact, this is a table with data roaming the Internet, which is protected from hacking and copying using cryptography (encryption) methods.
Blockchain has proved to be convenient for issuing virtual values, such as coins or tokens, that users can exchange directly with each other. The exchange program automatically adds new transactions to the registry and passes it on without requiring the participation of intermediaries.
Cryptocurrencies easily pass through borders and are not subject to the supervision of banks and regulators. But there is a problem – strong fluctuations in their rates. For example, bitcoin, which is traded absolutely freely and decentralized, can rise or fall against the dollar by 30% in a day.
In terms of transfers, they have the same advantages as other cryptocurrencies: instantly, anywhere in the world, without supervision.
How stable coins work
There are three basic mechanisms for linking cryptocurrencies to traditional money. They differ from each other in what asset is used as collateral when copying the rate. Relatively speaking, they have different degrees of proximity to real currency.
1. Cash backed
With these stable coins, each coin is collateralized by a unit of traditional money. This is usually a dollar account in a trusted bank, where funds from the sale of virtual coins flow and where they come out when people change them back to dollars. A kind of digital pad.
These are the most popular stable coins, including Tether, the third largest coin in the world in terms of transaction volume after bitcoin (BTC) and ether (ETH).
2. Collateralized with other cryptocurrencies
These stable coins do not have a guarantee account in a bank, but they are not empty candy wrappers either. They are issued on the security of other coins, which in total cost more than second-level coins. This allows them to peg to the dollar without buying the dollar itself.
For example, Dai is backed by 2x Ethereum (ETH) collateral and is calculated indirectly using an algorithm such that 1 Dai is always worth $1. In other words, even if the guarantor coin collapses by half, it will be possible to sell this collateral for dollars and return investors their money.
3. Algorithmic stablecoins
This type of coins may not be provided with anything at all, except for some kind of algorithm hardwired into them, which allows you to automatically reduce and increase the total number of coins, adjusting the rate to the selected monetary unit, usually the same dollar, less often – the euro.
The most famous example is Terus (traded on exchanges as UST). It is backed by the Terrilyn counterweight coin. These two cryptocurrencies are constantly issued and mutually destroyed in such an algorithm that Terrilyn collects all fluctuations, and the settlement rate of UST is equal to $1.