Stablecoins 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 like have just one flaw — Volatility. This price fluctuation can be monthly, weekly, daily, hourly, or in 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, stablecoins rarely undergo a massive price swing. This guide is all about understanding what they are, how they work, the pros and cons, and more.
What is a Stablecoin?
Stablecoins 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 stablecoins
Stablecoins 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 Stablecoins
Based on the modus operandi, there are three types of stablecoins:
1. Crypto-backed stablecoins
Also known as crypto collateralised coin, this type 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 stablecoins
Fiat currencies back a fiat-backed or collateralised stablecoin (usually in a 1:1 ratio). They are the most famous type of stablecoin and function based on issuing 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 a reserve of fiat currency (dollars, euros, gold, and more) that is less volatile than cryptocurrencies.
3. Algorithmic Stablecoins
This group of stablecoins is supported by neither fiat nor cryptocurrency. Instead, exchange rates are determined by algorithms. Token supply, in this case, is based on a 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 ‘collateralised’ stablecoins. 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 Stablecoins to invest in
1. Tether (USDT): Tether stands tall in terms of recognition because it is designed to tether itself to the US dollar value. 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 badly either.
Others include USD Coin (USDC), and True USD (TUSD), just to name a few.
Pros of Stablecoins
- Stablecoins 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 stablecoins. These digital assets serve as a channel for integrating cryptocurrencies into the traditional financial economy.
- Traders or investors prioritising hedges consider stablecoins the most suitable option for trading and their portfolios. Especially for a trader who is also interested in Bitcoin Gambling Games.
Cons of Stablecoins:
- Fiat-based stablecoins are designed with less decentralisation, 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 stablecoins, 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 stablecoin system is a new technology and will need time to become a major component of the global financial market.
With the world’s 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 stablecoins in their portfolio. This is because they provide a sufficient cushion for investments and portfolios. Will stablecoins run over the crypto market soon? That sounds very unlikely!