Stable coins offer investors the best of both worlds — less volatility and speedy transactions. Like every cryptocurrency, there is a need to study its uniqueness. Read on to know more.
Cryptocurrencies such as Bitcoin, Ethereum, Litecoin, and the likes have just one flaw — Volatility. This price fluctuation can be monthly, weekly, daily, hourly, or in a matter of minutes. Today (at the time of this writing), 1 BTC is valued at $13,579. If the exact valuation stands when you read this, you can start believing in magic. On the flip side of things, stable coins rarely undergo a massive price swing. Understanding what they are, how they work, the pros and cons, and more are what this guide is all about.
What is a Stable Coin?
Stable coins are configured to imitate or operate closely with the value of fiat currencies such as the dollar or euro. These established cryptocurrencies are unique in their ways because of their ability to maintain stability, globally. Hence the name ‘stable’.
The mode of operation of stable coins
Stable coins maintain stability thanks to their supporting reserve (E.g gold and forex) and timely decisions of higher authorities such as the central bank. They tend to bridge the vacuum between fiat currencies and cryptos by boasting of:
- Price stability
- Fast processing
- Payment security
Major types of Stable Coins
Based on the modus operandi, there are 3 types of stable coins:
1. Crypto-backed stable coins
Also known as crypto collateralized coin, this type of coin is controlled and issued via a smart contract. This contract entails monetary policies instigated by the participants and tailored towards their best interests. In other words, a user’s predictions must be spot on to experience profits.
2. Fiat-backed stable coins
A fiat-backed or collateralized stable coin is backed by fiat currencies (usually in a 1:1 ratio). They are the most famous type of stable coin and functions based on the issuance of a token from a bank with the fiat currency in reserve. It works just like a crypto-backed coin. The only difference is that it is has a reserve of fiat currency (dollars, euros, gold, and more) which is less volatile than cryptocurrencies.
3. Algorithmic Stable Coins
This group of stable coins is supported by neither fiat nor cryptocurrency. Instead, exchange rates are determined by algorithms. Token supply in this case is based on price fall or rise. If there is a hike in price, more token enters into circulation and if the reverse occurs, supply reduces. Hence, I do not fully support the idea of this asset being referred to as ‘collateralized’ stable coins. The fact that they have a system to handle volatility despite not being backed by any fiat or crypto should at least stand for something.
Top 3 consistent Stable Coins you can bank on:
1. Tether (USDT): Tether stands tall in terms of recognition because it is designed to tether itself to the value of the US dollar. It is supported by gold, cash, and traditional currency.
2. Paxos Standard (PAX): Created as an alternative to Tether, PAX maintains a 1:1 equity with the US dollar.
3. Binance USD (BUSD): Binance launched its dollar equivalent (BUSD), and it is not doing bad either.
Others include USD Coin (USDC), true USD (TUSD), just to name a few.
Here are a few pros of Stable Coin:
- Stable coins are designed to make a daily exchange or trading possible with less worry over price swings.
- It boasts of high predictability and less volatility such that it is acceptable by crypto casino
- Initially, the crypto and traditional market had little or nothing in common. The table turned with the advent of stable coins. These digital assets serve as a channel for the integration of cryptocurrencies into the traditional financial economy.
- Traders or investors who prioritize hedge, consider stable coin as the most suitable option for trading and their portfolios. Especially for a trader who is also interested in Bitcoin Gambling Games.
Concerning the downsides:
- Fiat-based stable coins are designed with less decentralization unlike BTC and other cryptos because it requires a central figure (support) for the entire transaction to be a success.
- For crypto-backed and algorithmic stable coin, the trader’s fate is based on the source code and the decision of the wider community for the system to keep kicking.
- All these points to the fact that the stable coin system is a new technology and will need time to become a major component of the global financial market.
With the world moving in the direction of digital transformation, crypto trading occupies a huge chunk of daily transactions. To mitigate losses due to the volatility, the network embraced the use of these coins and unpegged currencies.
Most traders or investors will tell you they have a minimum of 2 stable coins in their portfolio. This is because they provide a sufficient cushion for investments and portfolios. Will stable coins run over the crypto market soon? That sounds very unlikely!