Stablecoins – how it (sort of) calms the crypto market
People often bash the cryptocurrency market for its high volatility. Fortunately, stablecoins serve as an option with higher price stability. As you’ll see, they are one of the most crucial crypto assets in the market right now.
First, we will explain what stablecoins are and how they’re used in the crypto market. Then, we’ll discuss their potential risks and how they’re still changing today. We’ll also go through different examples and types of stablecoins.
If you want to be a crypto investor, you have to understand stablecoins. These digital currencies help everyone make sense of the exchanges. Learn how you can use them to your advantage, whether the market is bullish or bearish!
Cryptos ebb and flow, but not stablecoins
People often scratch their heads as to how cryptocurrencies can replace fiat. If you look at the crypto market, you might think it’s broken. Blink once, and prices go up and down!
Crypto investors understand this issue, though. That’s why they need stablecoins. These tie their value to a certain asset. It’s often the US dollar, but it could pin itself to other commodities.
For example, each USDt or Tether was backed by US fiat money. Now, Tether says almost half of its dollar reserves are in commercial paper. These are a type of corporate debt.
If you have stablecoins, it’s pegged to those commodities. This is why they’re classified according to their asset backing. Here are the different types:
- Fiat-collateralized – These are also called fiat-backed stablecoins. As we mentioned, these are tied to a specific fiat currency. It often uses the US dollar.
- Commodity-backed – Back then, people invested in bullion coins made of precious metals. These digital assets work the same way. It allows people to invest in gold or silver while still able to spend them easily.
- Crypto-backed – Like their namesake, these are pegged to other cryptocurrencies. It’s often bitcoin or ethereum since those are the biggest cryptos right now. To keep prices steady, their supply is lower than the crypto reserves.
- Algo-based – Think of them as “math-collateralized” stablecoins. These use smart contracts and algorithms to adjust to market demand.
What are some examples of stablecoins?
Photo Credit: Ethereum.org
We can’t cover each stablecoin available right now. According to CoinMarketCap’s stablecoin list, there are 65 varieties. That’s why we’ll stick to discussing four of the most well-known:
- USDt (Tether) – This is #3 on the cryptocurrency list. Soon, Tether will be the first stablecoin on the Solana network! As we said, half of its reserves are made up of US dollars while the other consists of corporate debt.
- USDC (USD Coin) – It’s the stablecoin managed by Circle and Coinbase. The former says US dollars back each USDC token.
- Facebook Diem (DIEM) – Yes, your favorite social media website backs a stablecoin! Like the USDC, cash and debts back Diem coins.
- Dai (DAI) – This works on the MakerDAO system. It is set apart from other ones because it runs on Ethereum smart contracts. Dai coins are pegged to the US dollar.
Their role in the crypto space and the real world
Tether token $USDt is the largest and most widely used stablecoin, but how is it being adopted worldwide?
Explore how Tether tokens are being used and the benefits of choosing USDt over traditional fiat currencies or other digital currencies⬇️https://t.co/VfkoSsQHZp pic.twitter.com/goPrkVcO2V
— Tether (@Tether_to) June 17, 2021
You might these coins are only for crypto investors. That couldn’t be further from the truth. These digital currencies have applications inside and outside the crypto market, such as:
- Day-to-day spending – Many stores nowadays accept cryptos and stablecoins for payments. Some might prefer the latter due to the steady prices.
- Making payments easier – Sending money back then involved a lot of steps. For example, your boss may send your monthly pay faster and easier as stablecoin! These coins could reduce transaction fees and processing times.
- Helping migrant workers – In the past, sending money overseas took a lot of time and money. Using stablecoins could do away with all these hassles. Other cryptos can help, too, such as Stellar Lumens (XLM).
- Securing against economic downturns – Stablecoins and cryptos help people in developing countries. That’s why El Salvador adopted bitcoin a month ago. Others invest in response to the rising prices of goods worldwide.
- Improving crypto exchanges – It’s hard to swap regular money with cryptos back then. Nowadays, it’s easy with these coins. This lets more people start investing and stop bitcoin moving the market too much.
These coins aren’t always steady though
Stablecoins are cryptocurrencies, so they have risks too. Cryptos, in general, are relatively new. They’re bound to have some issues. Here are some examples:
- May give too much power to tech firms – Companies may use crypto networks to take down others. It may also get too much info about its customers.
- A problem for developing countries – Weaker currencies might not keep up with these digital coins. In turn, they might find it harder to grow their economies.
- May promote illegal activity – Some may use cryptos to hide their money or fund crime.
- Loss of seigniorage – It’s profit from the difference between a currency’s face value and production cost. Central banks earn from this, but stablecoins may take it away.
- Unsure backing – We’re not sure what backs some stablecoins. If it turns out that there’s nothing there, the coin holders may lose money.
- Fiat backing still has risk – Stablecoins are pegged to assets that have some risks too. If something happens to the US dollar, those are in trouble.
- You can’t be sure with commodities – Let’s say you have gold-backed stablecoins. If strict gold laws come out, they might become harder to use. It won’t be easy to get the metal that backs it too.
- Crypto backing may crash – A bitcoin crash happened a few months ago. If you had BTC-backed stablecoins, its price might have dipped too. If the bitcoin price drops low enough, then the stablecoin’s price won’t be steady anymore.
- Math-backing is cool but still risky – You’re relying on many smart contracts to maintain your stablecoin. The wrong ones may not respond well to market trends. In turn, the price will have trouble keeping steady.
Cryptos or stablecoins?
If you’re a first-time investor, you might be wondering whether you should pick cryptos or stablecoins. Well, every investor needs both, no matter their long-term goals!
Let’s say you want to protect your buying power. Just pouring all of your money in stablecoins isn’t good. As we said, they’re backed by assets that may fail too.
Instead, it would help if you placed some of your funds in secure cryptos. Pick from the top 10 on CoinMarketCap’s list. Or you may choose from ours below:
On the other hand, let’s say you want profits. It would be best if you had stablecoins to buy and sell cryptos easily. They also help you pull your coins out in case of market crashes.
Investors need both to be successful. Have a healthy balance of cryptos and stablecoins in your portfolio. They can help you earn big returns and hedge against inflation.
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Final Thoughts
No matter what happens, cryptocurrencies will change financial institutions and their system. Stablecoins are just one way it will do so. We’ll find a way to beat these short-term issues.
Some may say fiat is safer but not backed by any asset. President Nixon removed the US dollar’s gold backing years ago. Soon, other countries did the same.
We’re seeing its effects now. After borrowing so much during the lockdowns, prices for everything are rising like never before.
Behind the scenes, big-time investors are using cryptos to hedge against inflation. Also, cryptocurrency is improving in various ways.
That’s why its market capitalization goes up every day! Fiat and crypto have issues. It’s up to you to pick one. What’s important is that you start investing!
Learn more about stablecoins
How many Stablecoins are there?
According to CoinMarketCap’s list of stablecoins, there are 65. Yet, new ones may have launched after this article has been published.
How safe are Stablecoins?
Their prices are steadier than most cryptos. Yet, they aren’t foolproof. Stablecoins are backed by assets that may face issues too.
What’s the point of Stablecoins?
Stablecoins make it easier to transfer and spend certain fiat monies. Also, investors can use them to buy and sell cryptos easily.
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