Stablecoins, initially were used as a way to avoid large price swings in high volatility cryptocurrencies, but have since become a critical cornerstone of the crypto market. The market is dominated by a stablecoin called Tether, but due to its popularity, several different stablecoins are now available on the market today, offering both competition and alternatives to Tether.
This guide will explain all there is to know about the ongoing stablecoin invasion, so you can determine if the benefits of decentralized currency outweigh that of fiat currency. In addition, we’ll explain how stablecoins different from other ordinary cryptocurrencies such as Bitcoin and how these new technologies are revolutionizing the world of financial transactions.
Stablecoins are digital assets with extremely low price volatility, which gives them the “stable” name. Stablecoins are designed to be tied one to one with other stable assets, such as USD, by being backed by actual dollars or other trusted assets. Other types of stablecoins rely on a cryptocurrency based algorithm to maintain a stable and consistent price per coin.
Stablecoins were developed on the basis that investors will need a digital replacement for the global reserve currency of the dollar, in addition to requiring an asset that doesn’t fluctuate in value significantly to use for financial transactions.
For example, Bitcoin was designed to be the first ever peer-to-peer system for digital cash, but because the price per BTC changes so frequently and by such a large amount, the value of the Bitcoin being sent could change by the time it is received, making it unsuitable for payments and other financial transactions.
Bitcoin instead is ideal as a store of value, so alternatives were developed with various attributes. Some cryptocurrencies chose to integrate additional features, such as smart contracts, while assets like Tether were created with the intention of being stable.
Tether is the most widely known and most traded stablecoin in the market today, however, the brand and parent company is surrounded by controversy, adding risk to the stablecoin itself that doesn’t exist with several competitors that have recently become popular and begun to catch up to the lead Tether currently commands.
Like Tether, most stablecoin cryptocurrency assets are centralized, and controlled by a third party unlike Bitcoin and Ethereum which are fully decentralized. This makes which parent company or consortiums are behind each project especially critical in choosing which stablecoins to place capital in.
Stablecoins work in a variety of ways, depending on the type of coin in question. The majority of stablecoins in the cryptocurrency market are directly backed by US dollars, which is how each coin achieves stability on an ongoing basis.
Some stablecoins are backed by other assets with greater stability, such as real estate, gold, and more. There are also a subset of cryptocurrency centric stablecoins that rely on a uniquely designed algorithm that manages the stablecoin’s price fluctuations.
Stablecoins have dozens of use cases in today’s cryptocurrency market, but they got their start years ago as a way to avoid especially violent crypto drops in price. Fiat crashes are extremely rare, but not impossible, making the fact stablecoins are backed by fiat currencies like the dollar a way to avoid volatility the cryptocurrency market is notorious for.
Crypto investors would trade their Bitcoin, Ethereum, or other altcoins for stablecoins like Tether or USD Coin when volatility picked up and prices began to crash. When Bitcoin price is going back up again, investors then safely move their capital from stablecoins back into higher risk cryptocurrencies.
Stablecoins also offer a way to make payments or send funds digitally using crypto assets, but ensures that the price remains consistent while the transaction takes place. Bitcoin block confirmations take as much as ten minutes, and not every block is confirmed right away. This leaves ample time for the price to change dramatically by the time the assets reach their destination from when they were sent. Stablecoins alleviate this issue, allowing for cross border payments, large transfers of capital, and general payments much more suitable.
Finally, stablecoins have other interesting use cases as the cryptocurrency industry develops further. The DeFi or decentralized finance movement has made stablecoins extremely attractive for the average investor to hold.
Previously, owning stablecoins was not a way to earn any income from capital. Unlike Bitcoin or Ethereum that grows in value over time, stablecoins always remain tied to the dollar typically. At $1 always, it doesn’t make for a positive investment at all. However, stablecoins can be staked or used as liquidity in DeFi applications, that can oftentimes earn the investor a yield or return on the stablecoins that are tied up in the application.
Types of Stablecoins: What You Need To Know
There are now over 40 different cryptocurrency stablecoin projects available in the crypto market, each offering their own range of features and unique benefits. Out of the 40 plus tokens out there, they are primarily broken down further into the following categories.
Fiat-backed stablecoins are, as the name suggests, backed by fiat currencies like the dollar, euro, or the yuan. Fiat currencies are extremely low volatility compared to crypto or stock market standards, making them “stable” in the eyes of the investor. The dollar itself is volatile and fluctuates in its conversion rate against other currencies, however, the $1 itself always remains at $1. Therefore, if a stablecoin is backed one to one with the dollar, it will always remain roughly at one dollar per coin.
Usually, but not always, this type of stablecoin also offers users the ability to redeem the stablecoin for a corresponding physical dollar, as each coin is supposed to be backed by a physical dollar in the company’s treasury reserves.
Crypto-backed stablecoins are systems designed that use one cryptocurrency to counteract the higher volatility of another. A set amount of cryptocurrency will be locked up matching the supply of the stablecoins, ensuring the peg of stability.
Stablecoins are sometimes backed by other assets outside of fiat currencies. This is more often than not gold but other commodities are used for this purpose. The supply of stablecoins would be pegged to the amount of commodities in reserve, maintaining a stable peg.
This type of stablecoin is governed by a uniquely coded algorithm that maintains a strict process to ensure stability, versus being backed by another asset or fiat currency. Essentially, using smart contracts decentralized platforms can autonomously back stablecoin assets.
Considering how many different stablecoins there are available today on the market, and the many different types, there are too many different stablecoins to list individually, however, here is a list of the most popular and most traded stablecoins on the market today.
Tether is by far the largest player in the stablecoin market, and has the largest supply and market cap. It is currently the third ranked cryptocurrency overall, behind only Bitcoin and Ethereum. That alone should provide some perspective on the stablecoin’s market share.
USDT is one half of many base trading pairs against Bitcoin and altcoins on most cryptocurrency exchanges, especially those that don’t have a fiat gateway and allow for USD base pairs.
Tether is created by the same parent company as cryptocurrency exchange Bitfinex, and the two brands have together been surrounded in controversy. Claims that the stablecoin isn’t accurately backed by a corresponding dollar have been unfounded despite several high profile investigations.
Tether is also said to have been used to manipulate the prices of Bitcoin during bull runs, and as its supply increases, so does the price of most top cryptocurrencies so the correlation cannot be denied.
USD Coin is a relative newcomer in the stablecoin market and is gathering a lot of popularity and market share. USDC is created by a consortium that includes Coinbase and other large, trusted and reputable brands.
True USD is another newcomer that has gained a lot of market share in recent months as the cryptocurrency industry has ballooned in size.
Paxos launched its stablecoin during the crypto bear market. Paxos also offers a gold-backed coin as well.
DAI is a crypto-backed stablecoin that relies on the Maker platform to maintain a value of roughly $1. It is a decentralized stablecoin, unlike the many centralized options listed above.
Binance USD is a stablecoin issued by the popular cryptocurrency trading platform Binance.
Gemini Dollar is a stablecoin issued by the popular cryptocurrency trading platform Gemini, owned by the Winklevoss Twins, Tyler and Cameron.
As this guide has revealed, stablecoins have several use cases that unlock a world of benefits for crypto investors. But they aren’t ideal for investing at the same time.
Here are the advantages and disadvantages of owning stablecoins.
The truth is, no, it is not at all smart to invest in stablecoins. But if there are so many benefits, why aren’t they a good investment? Because they are “stable” as the name implies. Stablecoins don’t fluctuate in value which is a positive in terms of avoiding crypto market downtrends and price depreciation. However, on the flipside, value never appreciates either. The only way to actually make money with stablecoins is by trading them back and forth with cryptocurrencies, or by staking them on a platform that provides a return on investment. But they still don’t make a great investment as an asset themselves.
Stablecoins are a new technology much like other cryptocurrencies, and therefore users have many questions. Here are some of the most commonly asked questions according to only user polls.
Stablecoins are a type of cryptocurrency that maintains a stable and consistent value, and is immune to the regular fluctuations of the cryptocurrency market. Stablecoins achieve this consistently in value through a number of methods, such as being backed by fiat, commodities, or other crypto assets.
Stablecoins are kept stable in a variety of ways. The most popular and common method involves backing each coin with a corresponding dollar or other fiat currency such as the yuan or euro.
There are now more than 40 different stablecoins in the market, but more are being created each day. Even though there are so many options, only a couple handful of coins are trusted and command a reasonable amount of market share.
No, Bitcoin is not a stablecoin. It is a cryptocurrency and a highly volatile asset. Bitcoin is the reason stablecoins exist in more ways than one. Without Bitcoin, no coin would exist, and without its volatility the need for stablecoins might not have come into light. When people do talk about Bitcoin being a stablecoin, they are joking about the rare phases of when the asset is experiencing sideways trading.
The best stablecoin is a subjective answer, and one only the user can decide. Currently, Tether is the largest stablecoin asset by market cap and the third ranked cryptocurrency overall. Because of this it is clearly the most used, but it is not the most trusted. It is difficult to call an asset that isn’t highly trusted the “best” but it is the current market leader.
Stablecoins are a great tool for cryptocurrency users and investors in more ways than one. It is an ideal way to send value to and from a destination, and method for avoiding market volatility when fiat currencies are inaccessible. However, from an investment standpoint, stablecoins are just not worth the capital. Any capital parked in stablecoins, will remain at that price forever, pegged to the dollar or whatever asset it is attempting to maintain stability with.
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