What are Stablecoins?
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What are Stablecoins?
Cryptocurrency has various advantages over fiat currency. One of the disadvantages though is its volatility factor. Though volatility can be a good thing in trading, it can also be tough to predict price changes in the market as values can rise or fall 10% or more in a single 24-hour period.
A stablecoin, on the other hand, is a stable, transparent “bridge” between fiat currency and crypto. The idea of digital coins linked to physical assets began back in the early 2010’s. In 2015, Tether Ltd. released USDT tokens attached to the value of the dollar, a 1:1 peg. Since then, other stablecoins have appeared on the market such as: Binance USD (BUSD), USD Coin (USDC), Dai (DAI), and TrueUSD (TUSD).
Most stablecoins are attached to fiat resources serving essentially as promissory notes: the deposit for the token is fiat currency, which is stored by a third party (e.g., in a USD bank account). Advantages include high stability and strong resistance to hacking.
Sometimes stablecoins are tied to liquid assets such as precious metals, gasoline, diamonds, or several high-value, reliable cryptocurrencies. Stablecoins also come in the non-collateralized variety. That is, their volatility is lower thanks to an algorithm made possible by smart contracts on a decentralized, autonomous platform.
How are Stablecoins Used?
Stablecoins simplify the leap into the crypto market for people with a lot of capital. People with a high net worth are used to transferring large sums of money from one account to another. Stablecoins work the other way as well. For example, they can be used as collateral for a loan since they absorb some of the risks associated with cryptocurrency.
Stablecoins act as a buffer to the fluctuations of cryptocurrencies when you need to temporarily (say for a few days or weeks) determine your gains. It’s similar to how traditional investors sell off part of their portfolio for cash or securities. Buying stablecoins lets you stay on the crypto market and still make new deals quickly.
The characteristics of stablecoins give rise to the trust people have in them. More people are willing to interact with them, and adding investors to the market increases the trade volume and market capitalization. Stablecoins help keep the crypto market healthy, increase transaction efficiency and ensure more accurate and fair valuations.
Stablecoin Attributes
Stablecoins combine many advantages of digital currency (safety, privacy, transparency, and low commissions) with predictable value that helps investors wait out periods of extreme volatility. They are an effective, convenient way to move money and protect investments.
One thing to remember is that stablecoins are controlled by their issuer, which creates a degree of centralization, and an opportunity for market manipulation. Crypto investors looking to buy stablecoins need to find a trustworthy exchange.
Additionally, stablecoins’ connection to real assets draws a lot of regulatory attention. Many people are scared off by the thought they may get tangled up in the web of laws, regulations, and reporting inherent in traditional banking.
Regardless, stablecoins have become a key part of the crypto world as a safer, more reliable trading medium for investors. It’s also a critically important component reinforcing the crypto economy, especially during a bear market.
Conclusion
In spite of stablecoins’ issues, its predictability and other intricacies of the blockchain make them fairly reliable assets. These days, you can quickly and advantageously buy crypto with stablecoins or trade more volatile crypto assets for them.
Experts say that as blockchain technology continues to develop, stablecoins will take on a prominent role in everyday payments. Perhaps, in time, it will become a real alternative to fiat currencies in countries with unstable economies.
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Author:
Ken Melendez
✍️ Head of Content @ Cindicator
📊 Certified Bitcoin Professional
🔐 Blockchain Chamber - Chapter President
Who is Cindicator?
Cindicator is a world-wide team of individuals with expertise in math, data science, quant trading, and finances, working together with one collective mind. Founded in 2015, Cindicator builds predictive analytics by merging collective intelligence and machine learning models. Stoic AI is the company’s flagship product that offers automated trading strategies for cryptocurrency investors. Join us on Telegram or Twitter to stay in touch.
Disclaimer
Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.