Because of the media, Bitcoin has become a pretty common term nowadays, and while it may be the most popular cryptocurrency, many are nervous to invest due to its extremely high volatility. That’s why folks are now turning towards stablecoins for a much more consistent and safe alternative.
What is a stablecoin?
Stablecoins attempt to bridge the gap between fiat currency and cryptocurrency. They have the benefits of cryptocurrency, such as decentralization, fast settlement, and less regulatory hurdles, while also possessing the stability of a dollar or other fiat currency. Generally, one token of a stablecoin is meant to be worth $1. This can obviously fluctuate with the market, but typically they are meant to hover around that amount.
Aditya Worah at Cryptoground explains it like this:
“Consider this scenario: you bought BTC at $5,000 – it then surged to $10,000 but the markets have begun to collapse again. If you keep holding your BTC, there’s a good chance you may end up with a lesser amount. To ensure that your value in USD remains stable, you can invest in stablecoins – which offer little to no fluctuation in price. You can then trade your $10,000 worth BTC to purchase $10,000 worth of stablecoins – and no matter what happens to the price of BTC after that, your $10,000 will remain safe.”
How do stablecoins work?
“The frequent spikes and crashes, as well as day-to-day fluctuations, have many concerned about actually using cryptocurrencies in everyday transactions, such as buying goods or services. No longer do people have to worry about the daily fluctuations of their cryptocurrency when deciding to make a purchase.” – MakerDao
There are two types of stablecoins: fully backed and algorithmic.
For fully backed stablecoins, the intent is to have $1 in the bank for every $1 stablecoin that exists. This is what Tether or TrueUSD does, and they hold actual dollars in reserve that are redeemable for the token.
Algorithmic stable coins, on the other hand, change the price of the currency using a market mechanism that follows the price of one US dollar.
Stablecoins may be the basis for a global currency. A stable and decentralized currency could allow people in countries with unstable monetary systems to keep their money secure. It also allows for more equalized cross-border transactions, which can help transform industries like supply chain, exchanges, shipping, and more.
What are the benefits to stablecoins?
The most important reason to invest in stablecoins is that they are meant to be safe from the volatility that plagues other cryptocurrencies. As many have noticed over recent months, the market has risen and collapsed repeatedly; however, stablecoins like Tether (USDT) have been helping traders stay afloat and provide a safe haven for traders until they are ready to reinvest in the market.
Secondly, stablecoins act as a “store of value.” This is no different from most cryptocurrencies, but stablecoins can easily be paid to traders for goods and services. Its standardized value keeps it attractive in the marketplace.
Stablecoins’ consistent value can act as a standard for other currencies. In a market that is affected daily by changing variables, stablecoins provide a measured unit. According to Cryptoground, stablecoins have also found good use in countries where governments are hostile towards cryptocurrencies. In india, the central banking authority banned transactions with crypto exchange and stablecoins provided a safe conversion to save one’s holding instead of withdrawing it.
What are the risks?
Stablecoins like Tether have been stable for a long time and are the best example of a modern working stablecoin. With how volatile the crypto market has been, some stable coins seem to act as an exception. That being said, AML/KYC laws, socialization of accounts, government actions, or centralization could still destabilize the whole thing. Stablecoins can be just as susceptible to risks as any other cryptocurrency, and there really is no data on long-term investing.
Tying a stablecoin to a fiat currency is difficult because inflation can disrupt the fiat currency, which in turn affects the stablecoin. Tying to a fiat-based currency is safer than tying to another cryptocurrency because for the time being, the USD is still a safe currency.
What are examples of stablecoins?
Should I invest?
Short-term investing in proven stablecoins may be beneficial. If you’re looking for the ability to redeem stablecoins quickly and easily and trust the issuer, this could be the right move for you. It can be a lot more practical in nature, but just like all forms of cryptocurrency, is not invincible. As it stands currently, stablecoins are the safest and least volatile cryptocurrency and can provide your investments protection in an ever-changing market.