If you’re new to cryptocurrency, you’ve probably stumbled across the term crypto pegging, but you might not fully understand it as yet.
Nonetheless, it’s a crucial concept that’ll help inform your investments and trading strategies. Want to learn more? Keep reading as we reveal everything you need to know.
What Is Crypto Pegging?
Crypto pegging sounds complicated at first glance, but it’s relatively straightforward.
Basically, a pegged cryptocurrency (also known as a stablecoin) typically has a fixed exchange rate with a bank-issued currency (also known as a fiat currency) or tradable commodity.
For example, USD Coin is pegged to the US dollar in a one-to-one ratio, meaning you can exchange one USD Coin for $1.
Similarly, PAX Gold is pegged to the precious metal itself – one digital token is worth one fine troy ounce of gold.
How Does Crypto Pegging Work?
So, how does crypto pegging work? It depends on the type of cryptocurrency.
While most are pegged to fiat currencies or commodities, some use other methods to determine their value. The four models include:
- Fiat-backed currency
- Commodity-backed currency
- Crypto-backed currency
- Algorithmic currency
Fiat-backed Currency
Fiat-backed currency is a cryptocurrency that’s pegged to a bank-issued currency. Most of the time, this is the US dollar. Governments often set the exchange rate at one-to-one.
Commodity-backed Currency
Some cryptocurrencies are pegged to valuable resources, such as crude oil, gold and silver. When these non-renewable commodities increase in value, the owners are guaranteed a profit.
Crypto-backed Currency
Crypto-backed currencies are pegged to other cryptocurrencies, notably Ethereum. Using cryptocurrencies to back each other maintains a consistent market price.
Algorithmic Currency
Some cryptocurrencies aren’t pegged to fiat currencies, other cryptocurrencies or commodities. Instead, they use clever algorithms and smart contracts to maintain equilibrium.
When a coin’s price falls, the algorithm will reduce the number of tokens in circulation and vice versa.
Examples Of Pegged Cryptocurrencies
Many cryptocurrencies you know and love are pegged, making them safer investments. Here are a few examples:
- Tether – pegged to the US dollar
- USD Coin – pegged to the US dollar
- Binance USD – pegged to the US dollar
- Ethereum – pegged to other cryptocurrencies
- Digix – pegged to gold
- PAX Gold – pegged to gold
- Petro – pegged to oil
What about Bitcoin? As it dominates the market, it doesn’t need backing. Like fiat currencies, consumer confidence plays a significant role in determining its value.
What Are The Benefits Of Pegged Cryptocurrencies?
Why should you invest in pegged cryptocurrencies? Let’s take a look at some of the benefits in a bit more detail.
Build Confidence
Many people are still cautious about cryptocurrency, partly thanks to Bitcoin’s unpredictability.
However, pegged cryptocurrencies are bolstering confidence and inspiring a brand-new generation of digital traders to step forward.
If you’re unsure which currency to invest in, you can’t go wrong with trusty stablecoins.
Less Volatile
Pegged cryptocurrencies are less volatile because they’re regulated by centralised authorities.
We know what you’re thinking – aren’t digital tokens supposed to be anti-establishment? Not necessarily.
Without some guidance and compliance measures, most cryptocurrencies wouldn’t be worth anything at all.
Hold Their Value
Stablecoins hold their value, especially when backed by priceless commodities. No matter what happens, your digital currency is always worth something tangible.
Now you know the ins and outs of crypto pegging, you’re reading to start trading.
Remember, the terminology isn’t as complicated as you think. Simply do your research, assess the risk and reap the rewards!
Commodity-Pegged vs. FIAT-Pegged Crypto
We discussed the difference between commodity-pegged and FIAT-pegged cryptocurrency in an above section.
So, now that you are aware of the benefits of stablecoins, let’s discuss whether it is better to hitch your wagon to commodity-pegged or fiat-pegged crypto.
Commodity-Pegged Crypto
The interest in gold-backed crypto has existed since day one. Usually, gold-pegged cryptocurrencies are linked to a certain quantity of gold. For example, 1 token may be the equivalent of a single gram of gold.
The main advantage of a commodity-pegged crypto is that the token’s minimum value will never change.
One gram of gold will always remain the same, meaning that 1 token will always be worth one gram of gold.
Fiat-Pegged Crypto
Fiat-backed stablecoins are a lot more common and popular. Most of the top-tier pegged cryptocurrencies are tied to the United States dollar.
Tether, Binanace USD and USD Coin are all backed by the dollar, and they are the most popular pegged cryptocurrencies on the market right now.
A major problem with fiat-backed stablecoins is that government regulators are not too fond of the companies who attempt to create products whose value is linked to central bank currency.
Digital currencies that are linked to the US dollar must have licenses in order to operate. On top of that, the company must be open and public regarding their business.
However, fiat-pegged crypto still remains much more popular than commodity-pegged crypto.
Ella Marcotte
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