Stablecoins in a Dollar Collapse: What’s the Fate of Fiat-Backed Tokens?

• Stablecoins are digital currencies pegged to another asset, which may include fiat, gold, or a cryptocurrency token, to stabilize its price.
• Tether’s market cap increased 5,500x from $15 million to $83 billion in five and a half years.
• In the event of a dollar collapse, the fate of fiat-backed stablecoins is uncertain.

The past decade has seen the emergence of private cryptocurrencies, with stablecoins being the latest iteration of money. Stablecoins offer investors a means to cycle in and out of crypto tokens and counter market volatility, and their market caps have grown exponentially in recent years. Tether, for example, has increased its market cap from $15 million to $83 billion in five and a half years—a 5,500x increase.

The increasing popularity of stablecoins raises questions about their fate in the event of a currency collapse. Stablecoins, such as Tether, are usually backed by a fiat currency, in this case the US dollar. Thus, a dollar collapse could have a significant impact on the stability of stablecoins. In theory, as Tether tokens are redeemable for dollars, the company should be able to honor redemptions. However, it is unclear what the impact of such an event would have on the stability of the token and the market in general.

The issue of a dollar collapse is further complicated by the fact that the US dollar is the world’s reserve currency. While the collapse of the US dollar would have a major impact on the global economy, it is unclear what would happen to other fiat-backed stablecoins in this scenario. For example, would the euro-backed stablecoin, EURT, be affected? And if so, how?

Another factor to consider is that the stability of any stablecoin is dependent on its backing asset. If a currency collapse were to occur, the backing asset of any fiat-backed stablecoin would be severely devalued. This could lead to a run on such stablecoins, as investors seek to cash out their tokens before their value drops.

Thus, in the event of a dollar collapse, the fate of fiat-backed stablecoins is uncertain. It is possible that such an event could lead to market instability and a loss of investor confidence. At the same time, it is too early to say what the exact impact would be, as the effects of a dollar collapse depend on a number of factors, such as the global economy, investor sentiment, and the stability of other fiat currencies.