What is Pegged currency

Pegging a currency means linking its value to the value of another currency, a group of currencies, or an asset such as gold, at a fixed exchange rate. This means that the pegged currency’s value changes in the same direction as the one it is pegged to.

In the context of cryptocurrencies, stablecoins are an example of pegged currencies. For instance, one USDT (USD Tether) is set equal to one USD.

Because cryptocurrencies are often criticized for their volatility, pegging the digital currency to a less volatile currency, such as a fiat currency, can offer some stability to their owner. This enables the introduction of additional services to the crypto world, such as loan and insurance provision.

Pegging cryptocurrencies is possible thanks to collateralization. This means that all cryptocurrencies owned must be held in a reserve and must have a value in cryptocurrency equivalent to the value of the asset they are pegged to.

It is worthwhile to point out that though pegging cryptocurrencies offers some stability, it erodes the possibility of making profit made from trading these digital assets, because stablecoins will always have the same value attached to a fiat currency.