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pegged cryptocurrency

Contributor(s): Ivy Wigmore

A pegged cryptocurrency is an encryption-secured digital medium of exchange whose value is tied to that of some other medium of exchange, such as gold or the currency of a given nation. Once the exchange rate is established between the currencies (usually 1:1), the value of the cryptocurrency fluctuates in the same direction and to the same degree as the currency to which it is pegged.

Unpegged cryptocurrencies are notoriously volatile, due to marketplace perceptions of risk and other factors. The price of Bitcoin, for example, has been recorded to fluctuate at ten times the rate of the United States dollar (USD). After a 40 percent drop in the cryptocurrency's price over a weekend in December 2017, there was speculation that the small amount of Bitcoin in circulation might have been suddenly and significantly increased by a single trader making a relatively large amount available and thus affecting the balance of demand and supply. Pegging a cryptocurrency to a more stable asset is designed to protect it from rapid and significant changes in value that could have a negative impact on anyone holding or trading in the currency.

Most pegged cryptocurrencies are based on the United States Dollar because it is the dominant currency in the global financial sector. Tether's USDT (US dollar tether), for example, maintains the same value as $1 USD. Cryptocurrencies can also be linked to other types of assets, such as gold and the currencies of other countries.  

To be pegged to a specific type of asset, the owners of cryptocurrencies must hold a value in the asset they are pegged to that is sufficient to provide a guarantee. Essentially, that requirement ensures that if the owners were required to convert all of the cryptocurrency to the other type of asset, they would be able to do that.  

This was last updated in December 2017

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What advantages and disadvantages do you see arising from pegging cryptocurrency values to the price of gold?


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