Can Bitcoin become a reserve currency? Things investors should consider

Bitcoin's commitment to supporting a crypto platform's "stablecoin" is causing controversy in the market. As a whole, it's part of an effort to make bitcoin the world's new reserve currency. With a $10 billion commitment from a crypto platform to support its own "stablecoin," the market has been revived. As a whole, it's part of an effort to make bitcoin the world's new reserve currency.

According to publicly accessible blockchain data, Seoul-based Terraform Labs has amassed about 40 000 Bitcoin worth $17.7 billion via a series of acquisitions made through a non-profit subsidiary, Luna Foundation Guard.

Since Do Kwon's declaration on Twitter last month that Terraform will acquire $10 billion worth of Bitcoin reserves to support TerraUSD, the project has gone into a buying frenzy, breaking ranks with other significant stablecoins, which are normally backed by US dollar reserves.

Bitcoin-backed stablecoins would “start a new monetary age of Bitcoin standard,” according to Kwon, a reference to the fold standard that was the backbone of world banking a century and a half ago. As the price of bitcoin continues to rise, the purchases as well as the prospect of more to come, are helping to keep the price stable, according to some market participants. Perhaps the most important question is whether Terraform's example will be followed by others.

According to Sid Powell, CEO of Sydney-based crypto lender Maple Finance, buying $10 billion worth of cryptocurrency may have an immediate impact on the market. In the long run, it’s a hint that Bitcoin has become the most popular form of collateral backing for currencies. As a result, because of the predicted price increase of the mentioned digital currency, many traders are seeking ways to get the most out of their trading process. One of these ways is Bitcode Prime, which allows investors to trade with the use of AI. Artificial intelligence can analyze useful information and make decisions based on the present and past data. As experts say, a stronger relationship between Bitcoin and stablecoins like TerraUSD might lead to a “death spiral” for investors in the long run, according to the market investors.

Are there any risks?

A stronger relationship between Bitcoin and stablecoins like TerraUSD might lead to a "death spiral" for investors in the long run, according to some market players. It doesn't matter either way you look at it. Short-term dangers can exist.

Richard Usher, head of OTC trading at BVB Group in London, said that “some individuals attempt to position long ahead of the purchasing, which might cause a collapse if the market begins to retrace.” Usher credited Bitcoins gains last month to an improved risk climate.

Arcane Research's Vetle Lunde analyst based in Norway who has been watching the Terra project's acquisitions, predicts that it might ultimately store between 60,000 and 70,000 Bitcoins to reach $10 billion in reserves. Tesla’s 43 200 Bitcoin reserve, the second-largest Bitcoin stockpile held by a public firm, would be surpassed.

The popularity of stablecoins is steadily rising. One of the most popular stablecoins is Tether, which can be easily exchanged for Bitcoin and other cryptocurrencies. Tether had a market capitalization of $44.5 billion a year ago, whereas TerraUSD had a market capitalization of $1.76 billion. According to CoinMarketCap, their value has now climbed around 85% to 850% to $82.3 billion and $16.7 billion respectively.

The fourth-largest stable coin TerraUSD is tied to the dollar like its siblings. But TerraUSD maintains its 1:1 dollar peg using a complicated algorithm that moderates supply and demand in a convoluted method that entails the usage of another balance coin, Luna. While maintaining the Terra project’s decentralization, the Bitcoin reserves provide an additional layer of security.

Are stable coins stable enough?

In the past, not all algorithmic stable coins were stable, with some losing both their peg and value. It's not yet clear how algorithmic stablecoins would fare in the event of a fall in contractions, which might result in a "death spiral," according to 21Shares analyst Carlos Gonzalez Campo.

There is a “vicious loop” in which the contraction of the UST also known as TerraUSD leads to the minting of LUNA and its subsequent decline in price, which causes further UST redemptions, he said, likening this to the bank run.

The Bitcoin reserve is designed to prevent this, but it might potentially spread the “disease”. The popularity of stablecoins is steadily rising. Many traders use them as a way to transfer money and speculate on the value of other cryptocurrencies. Because of that as the demand for the mentioned cryptos increases, the prices expand as well. Stablecoins, even though are comparatively new in the marketplace, they have gained popularity in a very short period of time. The main reason behind this was the volatile characteristic of the crypto market, where stable coins can maintain stability for the investors.

Tether, the largest and most established stablecoin, can be exchanged for bitcoin or another cryptocurrency far more easily than U.S. dollars can be exchanged for bitcoin.