(Un)stablecoins: Cryptos reach the crypt!

The sharp fall in cryptocurrencies and stablecoins has again revealed serious problems with them

- ANAND TANDON

In recent months, cryptocurrencies have captured the imagination of young investors and first-time investors like few other asset classes. Those who questioned the basis of treating cryptos as an asset were derided as people who didn't get the magic of technological innovations in the field of decentralised finance. Cryptocurrencies were the future of financial transactions and fiat currency was so yesterday! In May this year, it took less than a week for TerraUSD, a stablecoin, and its sister cryptocurrency, Luna, to lose over 99 percent of value.

Cryptos and stablecoins: What are they?

Cryptocurrencies are tokens that are created through algorithms that control 'creation' speed and quantity of the particular crypto. As opposed to 'fiat currency' that is issued by a sovereign state and backed as a 'legal tender', cryptocurrencies are controlled by algorithms, not by any institution. In reality though, the company that has created the crypto can modify its algorithms and it effectively controls them. The fundamental argument in support for the crypto is the debasing of fiat currencies by central banks. Most have expanded their balance sheets by unconscionable amounts over the past few years, leading to fears of run-away inflation and falling value of money - some of which is currently being witnessed.