Stablecoins supposedly offer a way to invest in crypto without the concern of fluctuating markets. Click here to find out what they are and how they work.
27 June 2022
31 August 2022
With cryptocurrency rising over the last few years, more and more people are beginning to grow interested in its value and potential for future financial return. Due to its relative infancy in contrast to traditional trading, however, there are many who still prefer stable, fiat currencies such as the US dollar or the euro. This currency is stable due to its connections to government regulation, making its value and tradeability far more assured in the eyes of the holder.
Cryptocurrency, of course, is run on a decentralised system, which bases an asset’s value on its native blockchain. In this way, whether it’s Ethereum, Bitcoin or Dogecoin, any one coin can fluctuate in its valuation, making some potential cryptocurrency traders feel uncertain. Of course, there are risks with any investment. In many ways, investing in a cryptocurrency has a significant potential for positive financial return but for those still hesitant about the next step of financial evolution, stablecoins have become a method to find a way in.
What Are Stablecoins?
Cryptocurrencies like Bitcoin, for instance, are not issued by a centralised bank, and therefore inflation rates that usually affect traditional currency do not directly affect the price of Bitcoin itself. Instead, the price of Bitcoin is determined by supply and demand, cost of production, as well as other competing cryptocurrencies. For instance, if the demand increases faster than the supply, then the price will go up.
A stablecoin, on the other hand, is a cryptocurrency that’s pegged to a stable asset to ascertain its value. This can be a fiat currency, a precious metal, or even other cryptocurrencies themselves. In short, they are made to mirror the currencies that have been used for thousands of years.
Traditional finance has been in place for centuries, and so, naturally, people have become accustomed to and comfortable with the knowledge that they know exactly what they are buying or investing in. Stablecoins resemble this way of trading, providing a less volatile way to invest in crypto coins. Like its namesake, it provides a stability of price for people transacting their coins in an infamously volatile market because it is pegged by an asset.
What Does Pegged Currency Mean?
Traditionally, a pegged currency is a policy made by the government, setting a specific financial exchange rate with another, foreign currency. This then stabilises the exchange rate between countries, allowing the market to be far more predictable in its fluctuations and value. The concept is relatively similar for crypto, as all stablecoins are pegged to an asset like the British pound or the US dollar.
For example, if a stablecoin is issued, it will essentially be underlined with a reserve asset. If a stablecoin held $15 million at a financial institution, that coin could issue $15 million coins in reserve, with a value of $1 each.
What Stablecoins Are Out There, and Which Ones Are The Best Investments?
There are many stablecoins out there which can make a good investment. For anyone looking to invest in cryptocurrency, but looking to own something which closely resembles traditional finance, with an asset which is assured in its value, then here are a few to consider:
Created in 2014 by Brock Pierce, Craige Sellars and Reeve Collins, Tether is the world’s first stablecoin. It is the most transacted and liquid stablecoin currently available on the market, sitting at around $80 million, making it the third-largest cryptocurrency overall, behind Ethereum and Bitcoin.
While USDC was only launched four years ago, it sits on a market cap of almost $50 billion, making it the second-largest stablecoin after Tether. Like Tether, USD is also pegged to the US dollar, and since its rise in the cryptocurrency market, it has been used by many businesses and applications to make their payments more accessible, more efficient and globally secure.
Designed to eliminate fraudulent financial tampering, TrueUSD has fully audited reserves, with no trading fees for investors and, more-or-less, full transparency. Unlike other cryptocurrencies, however, it is not fully decentralised, meaning users are subject to the terms and rules of the platform. It currently sits at $1.1 billion US dollars.
Powered through the Ethereum-based MakerDAO, Dai is a little different from other stablecoins because it is not solely tied to traditional financial assets. While it is pegged 1-1 with the US dollar, Dai can also be pegged with other cryptocurrencies such as Ethereum, Bitcoin, or USD. With smart contracts used to secure collateral and an option for users to vote on more collateral options, Dai has valuable transparency, which makes it one of the stablest options in the world of cryptocurrency.
Should I Buy Stablecoin?
While stablecoins are considered to be a safe long-term investment, there are still risks involved, just as there are for any cryptocurrency. At the end of the day, part of the appeal of crypto trading is the ability to get rich quick, with the reward often tending to outweigh the risks themselves. While it may be a good idea to start investing in stablecoins, they are not necessarily the perfect replacement for powerhouses like Ethereum and Bitcoin.
One major use, though, is that stablecoins are effectively used as fiat money within the crypto ecosystem. Instead of trading bitcoin into US dollars are a price increase and profiting, traders opt to trade their crypto-asset for stablecoins because it’s quicker. Trading back into fiat from crypto requires made regulatory checks which can take a few days, meaning traders may have to delay further investments.
Like anything in the cryptocurrency world, it is essential to weigh up options, market caps, fluctuations, and risks vs rewards. Just because stablecoins are described as more stable assets, it does not necessarily mean they are the only option going forward. For newcomers to the market, however, stablecoins can be an excellent way to get into the field, as they will give the user more reassurance when it comes to investing before allowing themselves to dive deeper into the blockchain.
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