The world of cryptocurrencies is a diverse one. Some are designed to remain as stable as possible. Others can rise or fall sharply within a short space of time.
What kinds of crypto-assets are there?
Crypto-assets fall into two different groups.
“Stablecoins”are designed to maintain a stable value. They are generally tied (“pegged”) to a currency such as the US Dollar or other assets such as gold. Their objective is to track the performance of the asset they are tied to.Other crypto-assetslike Bitcoin or Ether are not anchored. Their price depends on supply and demand, and can therefore change quickly and strongly.
What makes stablecoins stable?
Stablecoins’ price is intended to fluctuate as little as possible. They are therefore pegged to a reference value, such as a currency or an asset. As a rule, their price tracks this value. As a result, they appear more stable than other crypto-assets. It is important to remember:
- Stability depends on whether the underlying assets are actually available.
- These assets must be stored securely and be available at all times.
- The reference value itself may also change.
It there are problems, then a Stablecoin may be depegged, and fluctuate significantly in price. Not everything bearing the name “stablecoin” is stable.
Why do other crypto-assets fluctuate so strongly?
For many crypto-assets, the price is determined solely by the market. Even slight changes can have massive effects. The price is influenced by
- supply and demand
- economical and political developments
- technical innovations
- the sentiment of the market or in social media.
Speculative behaviour also plays a large role. Many people react quickly to news or trends. Crypto-assets are also traded around the clock. This means that prices can change quickly at any time.
What does “crypto winter” mean?
A crypto winter is used to describe a longer phase during which the prices of many crypto-assets fall substantially, and only recover slowly. The typical characteristics are prices that fall over a longer period of time, less trading and a generally more cautious mood on the market. Such phases show how strongly crypto-assets can react to uncertainties and market sentiments.
Why are forecasts difficult to make?
It is very difficult to predict how other crypto-assets will perform. Prices can change quickly and at any time. The important thing for you to remember:
- Always reckon with uncertainty!
- Past performance is not a reliable indicator for the future!
What should you bear in mind before taking a decision?
- Does the “stablecoin” fall under the MiCAR (Markets in Crypto-Assets Regulation) regime, and is it therefore regulated?
- Is the crypto-asset really tied to a reference value, or is stability a mere promise?
- Would you be able to cope, if the price fell significantly?
- Are you aware that performance is unpredictable?
- Does the offer seem too good to be true, such as in terms of guaranteed profits?
If you are unsure, or if something seems unrealistic, pay particular attention!
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Stability:
A stable asset has a very steady value, and does not react strongly to changes in the market.
Volatility:
describes how strongly a price changes. The price of a volatile crypto-asset may rise or fall quickly and significantly.
Depegging:
where the peg to the originally reference value is lost.
Speculation:
trading with the expectation of making a quick profit, often risky!