Stablecoins are created to remove price fluctuation associated with other kinds of cryptocurrency. They provide crypto users with more benefits, in terms of less volatility.
Stablecoins are kinds of cryptocurrencies whose values are pegged to the value of real assets like the US dollar. These coins were developed as a tool of response to the volatile nature characterized by traditional cryptocurrencies like Bitcoin and Ethereum, which are limited in utility as a result of steady changes in their market price.
Today, we can talk about stablecoins as the critical component of an emerging class of crypto products called decentralized finance (DeFi), in which transactions are made without the meddlesome of third parties like banks or brokers.
Popular stablecoins with the highest market capitalization on the crypto market are Tether (USDT) and USD Coin (USDC).
In the scope of mulling over the use of cryptocurrency for different purposes other than trade or investment, the importance of a stable coin could come to play, in the operation of borrowing, lending, and financing.
Although stablecoins have been subjected to regulatory scrutiny, there are risk-related features attached to their use to bring value to the market.
What Are Stablecoins?
Stablecoins are a kind of cryptocurrency created to provide more stability to the coins than other cryptocurrencies. As some stablecoins use algorithmic functions to keep the fluctuation of their values at bay, others are supported by the reserve of the asset they represent.
Stablecoins Vs.Other Cryptocurrencies
Every cryptocurrency operates exclusively on blockchain technology. This innovation allows secure ownership of digital assets, without the control of banks or governments. Cryptocurrencies are decentralized on the blockchain network, such that cryptography is used to protect the recorded transactions from fraud or other malicious attacks.
Supply and demand are often the determining factors of the market value of any cryptocurrency. Therefore, crypto users buy them with the high hopes of a value increase, over time.
Meanwhile, stablecoins are not designed to fluctuate much in market value. So if you spend a stablecoin with a direct link to the dollar value, there is every tendency to have a slight change in the crypto price, concerning either making a huge gain or incurring a significant loss.
Best Stablecoins By Market Capitalization
According to CoinMarketCap as of March 1, 2022, these are the ten (10) highest trading stablecoins by market capitalization.
- Tether (USDT): $79.5 billion
- USD Coin (USDC): $53.5 billion
- Binance USD: $18.3 billion
- TerraUSD: $13 billion
- Dai: $9.7 billion
- TrueUSD: $1.5 billion
- Pax Dollar: $947.4 million
- Neutrino USD: $493.9 million
- Fei USD: $423.5 million
- Tribe: $265.4 million
How Does Stablecoins Work?
Fiat currencies (traditional US dollars), other cryptos, and precious earth metals, the operation of stablecoins. Nonetheless, crypto is vulnerable to potential risks from other cryptocurrencies supporting it.
For example, a fiat-backed stablecoin may be more stable since it is linked to a centralized financial system with an authority figure (such as a central bank) that may intervene and stabilize prices during periods of market volatility.
Stablecoins that are not tied to centralized financial systems, such as a bitcoin-supported stablecoin, may see dramatic and rapid price changes, in part because there is no regulating agency monitoring the stablecoin’s peg.
Crypto-Supported Stablecoins
These are stablecoins supported by other cryptocurrencies. Due to the volatile nature of traditional cryptocurrencies like Bitcoin, the collateral imposed on crypto-supported stablecoins is always higher in value to ensure the value of stablecoin has some stability.
For instance, a $5 crypto-supported stablecoin may be pegged to an underlying cryptocurrency worth about $10, to have a built-in cushion of about $5 in the event of value loss for the underlying crypto.
This type of stablecoins has less stability, compared to fiat-supported stablecoins. Therefore, it is important to stay updated with the latest performance of the underlying cryptocurrency behind the stablecoin.
One typical example of a crypto-supported stablecoin is Dai, which is tied to the fiat US dollar while running on the Ethereum blockchain.
Fiat-Supported Stablecoins
Often described as an IOU, these are stablecoins that can be bought by fiat currencies and redeemed later for your preferred currency. Different from how crypto-supported stablecoins are affected by the volatile nature of crypto assets, fiat-supported stablecoins are designed t have a little fluctuation in price.
Moreover, it is not again to say that stablecoins are safe in their entirety, they are still in their early phase, and as such, some of their risks remain unknown with few track records.
An example of fiat-supported stablecoins is USD Coin, which is traded on Coinbase at a 1-to-1 ratio with US dollar.
Precious Metal-Supported Stablecoins
Precious metals, like gold and silver, can enable some stablecoins to manage their market value. Characterized by a centralized nature, which many crypto users see as its pitfall, precious metal-supported stablecoins are often prevented from crypto volatility that touts most cryptocurrencies.
For a long time, gold has been a potential alternative form of investment against the stock market that is defined by inflation and volatility.
An example of gold-supported stablecoins is Digix. This stablecoin provides its investors with the ability to invest with transportation and storage concerns of gold.
Algorithmic Stablecoins
This type of stablecoins is very different from the aforementioned types. This is because they are not supported by any asset. Algorithmic stablecoins use computer algorithms to stabilize the coin’s value from steady fluctuations.
How this works in an algorithmic stablecoin is that, if the price is pegged at USD 1, but the stablecoin climbs, the algorithm would automatically release more tokens into the supply to bring the price down. The fall in price, below $1 would also reduce supply, resulting in a price increase again.
The number of tokens you possess will fluctuate, but it will always reflect your ownership percentage. AMPL is one algorithmic stablecoin that its inventor claim is better suited to withstand demand fluctuations than other stablecoins.
Why Do People Use Stablecoins?
The creation of stablecoins is intentional towards having the vantage point of withstanding volatility while providing accessibility and mobility. It should, however, be noted that decentralization is peculiar to a more stable cryptocurrency, such that it does not bow to the control of a centralized system.
This decentralized feature made way for the emergence of DeFi, with the potential to make money transfers easy, fast, and secure. Other advantages include unlimited access to numerous financial services, the privacy of financial data, and the exclusion of financial service fees.
Furthermore, while stablecoins may not have enough investment like other cryptocurrencies, they can be more useful as a form of digital currency instead of an investment outlook.
Stablecoins can also be used for crypto staking, which takes place when crypto owners sarn certain rewards from lending out their holdings to help in transactions’ execution. But, there are some risks associated with staking, so endeavor to read on specifics for your preferred coin.
Associated Risks Of Stablecoins
On the heels of stablecoins being less volatile than other cryptocurrencies, stay woke to the fact that they are still in the digital space, which may culture certain vulnerabilities or unknown bugs. Due to this, there may be the likelihood of private key loss, which provides the access to your cryptocurrency. This eventuality can be a result of user error or hack.
In the wake of the awareness of the possible risks of stablecoins, a high level of the regulatory framework has been put in place to deal with its uncertainty.
It could be recalled that a report prepared by the United States government called for additional regulations on stablecoins. Although these regulations might foster consumer protection, they will have some kind of effect on different stablecoins and their holders.
Where Can You Buy Stablecoin?
An account with a trusted crypto exchange or digital wallet is required before you can start buying stablecoins. Crypto services can vary across geographic locations, as some services may not be available in your location.
Therefore, ensure your preferred options are available in your locality. There are some stablecoins available on exchanges like Coinbase or Binance, although the centralized exchanges can only be operating with fiat-supported stablecoins.
How To Buy Stablecoins Safely
Buying cryptocurrency for the first time can be a bit frightening. To avoid losing money or paying excessive fees, you should avoid scams. Here’s how you can buy stablecoins safely and without incurring additional charges.
Decide On Your Preferred Stablecoins
Decide on the type of stablecoin you desire first. The majority of stablecoins are pegged to the dollar, although others are based on gold or even other cryptocurrencies.
Stablecoins are a great way to diversify your cryptocurrency portfolio. There are stablecoins issued by a few of the best cryptocurrency exchanges.
Choose A Trusted Crypto Exchange
Get the stablecoin you’re looking for on an exchange. If you’re interested in a particular stablecoin, you should do this.
Once you’ve found an exchange you like, buy whatever stablecoins they have available. If you’re willing to accept any stablecoin that tracks the US dollar, then go ahead and do this. There is at least one of them on nearly every major stock exchange.
Create An Account
Sign up for an account with the cryptocurrency exchange you’ve chosen. Depending on the exchange, the registration procedure may vary slightly, but in general, it is simple. To establish an account, you may be asked to enter the following details:
- Full name
- Email address
- Phone number
You’ll be asked to verify your identity at some point, whether it’s before or after you create an account. To ensure that accounts aren’t being used for illicit activity and to comply with tax reporting laws, exchanges need to perform this procedure. To ensure your identity, the exchange may request the following:
- Date of birth
- Social Security Number
- A scan of valid ID document
Deposit Money
You can buy crypto by depositing money into your exchange account. Transferring funds from your bank account is the preferred method. You can add your bank account as a source of funding by entering your account and routing numbers in the appropriate fields. Then, transfer the amount that you choose. All of this may be accomplished via a crypto exchange.
Remember that the transfer can take up to a few business days to complete. Because cryptocurrency exchanges sometimes set off banks’ fraud detection systems, you may have to approve the transaction there as well.
You may buy cryptocurrency with a debit card, credit card, or PayPal at several exchanges.
Buy Your Stablecoin
Decide whether or not you want to invest in cryptocurrencies by selecting this option. “Buy” buttons and pages are available depending on the exchange. Choose the stablecoin you want to use and the amount you want to spend with it. The transaction preview will show you the fees, the total cost, and the amount of stablecoin you’ll get. You can proceed with the purchase when you’re ready.
Conclusion
Stablecoins are relatively a crucial part of the crypto market, providing an easy and safe channel of exchange for crypto investors and traders. When the crypto market is bearish, stablecoins can be pivotal in fostering the crypto world.
