Toward greater stability in stablecoins: Empirical evidence from an analysis of precious metals

Abstract

Cryptocurrencies surged in popularity as an alternative medium of payment and security among both users and investors. However, the recent collapse of Bitcoin, Ether, and other traditional cryptocurrencies has raised concern about their capacity to function as a good store of value, investment, or hedge. Stablecoins, a kind of cryptocurrency that backed by physical or financial assets, have emerged as a potential solution. However, the latest failures of some algorithmic stablecoins and depegging of fiat-backed stablecoins have demonstrated that not all stablecoins can guarantee their stability. This study examines precious metal–backed stablecoins as a more stable alternative and attempts to identify the most suitable metal. We employed MGARCH-DCC, wavelet coherence, and simulation-based optimization techniques to explore the optimal precious metal for this purpose. Our findings indicate that a combination of gold and silver at a ratio of 88:12 is optimal. We offer critical policy implications and recommendations for various stakeholders.

Keywords

• C22
• C54
• E42
• G15
• O33