Stablecoins play a major role in the crypto eco-system!
Since its inception, the crypto market has been well known for its high volatility and rapid price moves. But while this high volatility might be a good thing for crypto traders and investors, it is a nightmare for anyone involved in crypto e-commerce.
This is where Stablecoins come in! For buying and selling of goods and services to occur over the blockchain network, we needed to have a cryptocurrency with a stable value. This way transactions and online purchases can be made easier using a stablecoin as the crypto payment method.
Key Properties Of Stablecoins
- Stablecoins are digital currencies that are pegged to fixed reserve assets such as US dollars, gold, silver, or commodities like oil.
- Unlike other cryptocurrencies, stablecoins are made to reduce volatility.
- The main objective of stablecoins is to establish a cryptocurrency that doesn’t have uncertainty and will not change its price.
- It is a combination of enjoying the best of both worlds.
TYPES OF STABLECOINS
There are three types of stablecoins: fiat-backed, crypto-backed, and algorithmic.
1. Fiat-Backed:
These have fiat currency reserves such as US dollars, gold, and silver as well as commodities like oil. However, nowadays most fiat Collateralized stablecoins employ dollar reserves.
Independent caretakers take care of such reserves which are audited daily to make sure the necessary compliance is achieved. True USDT and Tether are well-known cryptocurrencies that are backed by dollar deposits and have the same value as a single US dollar.
2 Crypto-Backed:
These stablecoins are backed by other cryptocurrencies, they may be volatile but these kinds of stablecoins are over-collateralized.
This means that a larger amount of cryptocurrency tokens are kept as reserves to release a smaller number of stablecoins. For instance, $10,000 in Bitcoin might be retained as reserves for releasing $5,000 in crypto back stablecoins which would amount to up to 50% of reserve currency movements. The price stability gets improved through more frequent audits and monitoring.
3 Algorithimic:
This type of stablecoin has a working mechanism to keep the price from fluctuating just like that of a central bank.
It is an investment that doesn’t get affected by supply inflation and stays the same regardless of the price movements of other cryptocurrencies, especially Bitcoin.
How To Buy Stablecoins
Purchasing your first stablecoin is quite easy. All you need to have is a crypto wallet where you can store your coins once you buy it. This wallet can either be on a centralized exchange or a Decentralized exchange, it does not matter. What matters is that you have access to the wallet and you can transact on it.
The best centralized wallet we recommend to our readers is Bybit. They offer a highly secured wallet that allows you easily buy, convert and sell various types of stablecoins all on an easy to use interface.
If the idea of owning a crypto wallet sounds new to you,
Check out this article: What is a Crypto Wallet and How To Get One?
PROS OF STABLECOINS
- Stablecoins are beneficial when investing on platforms like AAVE or Compound where you can receive interest on your crypto assets.
- You don’t have to worry about the volatility of price because stablecoin is always steady.
- They do not require a bank to be held in and they are easy to transport.
- Buyers and sellers can have confidence that the value of their tokens won’t fluctuate unpredictably if their investment is linked to a more stable currency like stablecoins.
- The value of stablecoins may be easily transmitted around the world, especially to regions where US dollars are hard to come by or where the local currency is not stable.
CONS OF STABLECOINS
- Collateralization problem: A lot of rumors have been circulating about tether not being backed by true cash. If this is true and people get scared, the price could go unsteady and unpeg from the US dollars.
- No insurance: Unlike the central banks, anyone that decides to save in stablecoins bares the sole loss if the coin he is holding unpegs and crashes. But situations like these have been far and in between.
Check out this article: What Drives the Crypto Market Price?
HOW TO MAKE USE OF STABLECOINS
Stablecoins are mostly used as a means to reduce cryptocurrency’s market volatility or for online transactions and purchases.
• It can be used in the world of decentralized finance (DeFi). For example, it can be used for yield-farming, lending, and Liquidity provision.
• Crypto staking is also becoming popular. In staking, you get paid interest when you luck up your crypto in an exchange for a period.
Conclusion!
No matter what you decide to do, stablecoins are the most reliable way to put money into the virtual market. It closes the gap between fiat currencies like US dollars and cryptocurrencies and makes blockchain e-commerce possible.
Now adays, it is very rare to find a crypto investor who hasn’t held stablecoins in his portfolio at one point or the other. However, it is important to note that these types of crypto coins are not a 100% secured investment. Although rare, we have seen instances of stablecoins de-pegging or even whole stable coin projects totally failing.
So before you invest in any crypto stablecoin, it is highly recommended that you take extra caution and make your research.
Check this article out: Beginners Guide: How To Create A Balanced Crypto Portfolio For Any Kind Of Market Condition.
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