Stable currencies can help you manage volatility on the cryptocurrency markets. For investors looking for exposure? However, they are worried about rampant volatility. Nevertheless, stablecoins can be interesting.
Crypto-currencies such as Bitcoin and Ethereum are shaking things up. Moreover, many investors are interacting and thinking about money. Indeed, traditional investors may choose to stay away. Given that prices can change radically from one moment to the next.
Important questions surrounding stablecoins?
Stablecoins, on the other hand, are less prone to volatility. Stablecoins are cryptocurrencies backed by an asset, most often a fiat currency. What’s more, they retain much of the appeal of other cryptocurrencies. In fact, the latter offer investors access to a new and rapidly evolving asset class.
Here’s what you need to know about stablecoins :
- What are stablecoins?
- Stable currencies backed by financial assets.
- Cryptocurrencies backed by stablecoins.
- Stable coins backed by commodities.
- How to use stablecoins.
- How to make money with stablecoins.
What is a stablecoin?
A stablecoin is a digital currency linked to an underlying asset. Such as a national currency or a precious metal like gold. The main types of stablecoin include
- fiat-backed stablecoins,
- those linked to cryptocurrencies
- Commodities.
Stablecoins are a type of cryptocurrency designed to maintain a fixed value. Moreover, it is often attached to a fiat (government-backed) security. In effect, cryptocurrencies are a new asset class. Moreover, it is evolving rapidly in an increasingly technology-driven economy. As a result, cryptocurrencies are subject to significant volatility. What’s more, their value can change in a matter of seconds.
Stable currencies backed by fiat money
A popular stablecoin is Tether (USDT). This is the first stablecoin to come to market with both the widest adoption and the largest market capitalization. Although it is pegged to the US dollar in a one-to-one ratio.
Its solvency is based on the strength of its reserves, which include only 3.87% liquidity. USDC is another stablecoin backed by the US dollar. It is being launched in 2018 by Coinbase and Circle. These are centralized stablecoins. This means that one entity or exchange holds these digital currencies. In the case of the USDC, this stablecoin is managed by Circle and Coinbase.
One of the risks with stablecoins is to keep their supply of dollars equal. This is seen as going against the concept of decentralization.
Stablecoins backed by cryptocurrencies
DAI is a decentralized stablecoin backed by cryptocurrencies. According to a white paper by the Maker team, Maker, a smart contract platform built on the Ethereum network. It supports and stabilizes the value of DAI through a dynamic system of :
- secured debt positions,
- autonomous feedback mechanisms
- and appropriately stimulated external players.
The aim of this digital asset is to try to maintain its respective value to the US dollar. It is maintained on the Ethereum blockchain network. This is done by allowing people to use their Ethereum assets. In addition, it generates DAI on the Maker platform without intermediaries. This means that everyone helps to maintain the blockchain. It’s not controlled by a single person or entity.
Stable coins backed by commodities
These stablecoins are backed by precious metals such as gold or oil. Among the best-known coins in this category are Tether Gold and Paxos Gold.
Stable coins backed by commodities are more sensitive to price fluctuations. However, commodity values are expected to rise over the long term. Investors can buy and hold this asset for capital appreciation.
How can I use Stablecoins?
One of the main ways to use Stablecoins is to make fast, cheap payments or money transfers on a global scale. They offer a fast way to transfer deposits or withdrawals between fiat currencies and cryptocurrency exchanges.
“One of the most powerful uses of stablecoins is payment,” says Nemil Dalal. Incidentally, he is the head of crypto at Coinbase.
With stablecoins, users can send money anywhere in the world in a matter of seconds. Since they are a stable currency. They provide an easy payment stream. This allows businesses to send money to their employees securely.
When cryptocurrency users observe significant price movements. They can transfer their money to stablecoins. What’s more, they wait for the market to stabilize. Cryptocurrencies are on the decline. What’s more, people generally seem to buy stablecoins and use them to get out of volatility.
Another advantage of stablecoins is their ease of use across cryptocurrency exchanges. They are highly liquid and tradable. This means they can be easily exchanged for other cryptocurrencies or fiat currencies if desired.
It’s not easy to transfer cash in and out of cryptocurrencies. Even if you place a sell order. The withdrawal takes several days to finalize. But if you convert your money into stablecoin, you retain its value.
