In a world of volatile and fluctuating cryptocurrency, there's still a pretty stable alternative. As a matter of fact, it has the word "stable" in its name, as we call it Stablecoins. What are Stablecoins? This article should allow you to get a pretty good grasp on what Stablecoins are and if Stablecoins are a good investment!
Stablecoins possess all the potential that you need in a money-making yet stable and less volatile alternative. It has been more popular over the years, and its market cap recently reached $10 billion for the first time.
We’ll answer what Stablecoins are and should you pick Stablecoins over other cryptocurrencies. And, are they even worth investing in? Let's try to dig deeper and explore more on what Stablecoins truly are.
A Brief Description
To start, we must first define what Stablecoins are. Stablecoins are a type of cryptocurrency in which a stable asset pegs its price—or backed by a group of assets.
Most Stablecoins have their price pegged to a Fiat, i.e., the currency of a country. But, it does not limit itself to a certain currency. Stablecoins can also be pegged to certain commodities such as Gold and even other types of cryptocurrencies.
Now, you might be wondering where the "potential" was from the previous statements. The potential lies in the current situation of Stablecoins. A lot of people see Stablecoins to possess the "best of both worlds" quality.
Stablecoins does not possess the incredibly unpredictable volatility of cryptocurrencies like Bitcoin suffers from. But, Stablecoins still possess the same blockchain technology. Thus, the term "stable" in Stablecoins.
How Does It Work?
In turn, the two advantages that Stablecoins have are price stability and low volatility. You should have one dollar in the reserves for every Stablecoin that you possess. But, how is this "stability" and "low volatility" achieved?
We should first tell you upfront that although they are "stable," Stablecoins are not immune to volatility. They are only as stable as the assets they're pegged with, which are also expected to be stable. These Stablecoins could still experience certain price swings, and without a doubt, it will affect its volatility. However, this occurrence is rare as Stablecoins, again, are pegged to assets with high stability.
Trust is also a factor in keeping Stablecoins stable. The market needs to trust a particular asset that the Stablecoin is pegged to. In turn, you'll only see Stablecoins pegged with USD currency, Gold, and of course, Oil.
One example of a Stablecoin pegged to a stable asset is Tether (USDT) and the US Dollar. You already know that for every USDT, Tether keeps a corresponding dollar in its reserves. The value of USDT has always nearly been close to one dollar in terms of value. Thus, without a doubt, the market trusts that one unit of USDT is worth one dollar.
When Can You Use Stablecoins?
There are numerous scenarios wherein Stablecoins can be deemed useful. These situations are:
- Certain Transactions
Of course, you can use Stablecoins for transactions. The current blockchain technology has been enabling international transactions way faster and significantly than traditional means.
To add, merchants and some individuals may be hesitant or even resist transactions done in cryptocurrency that are volatile. It is reasonable to resist and be hesitant to transact using a highly volatile cryptocurrency. By using Stablecoins, this volatility and risk should be lower, if not absent.
Some developing countries use Stablecoins as an alternative to bank systems that are failing. These developing countries are the ones wherein many do not have a bank account and are currently dealing with absurd hyperinflation scenarios. A good example is the Stablecoin Project Reserve, which started in 2019 to combat these issues in Venezuela & Angola.
- Exchange From Other Cryptocurrencies
One could exchange Bitcoin for Stablecoin to avoid certain risks and expensive processing fees. A trader cannot deny that there's always the risk of the price of Bitcoin potentially falling against the USD. In turn, exchanging it for a Stablecoin that is pegged to the price of the US Dollar takes away those risks and the expensive fees of exchanging it to Fiat.
There's an Asset Exchange alternative that one can find on Bybit. Bybit gives traders the alternative to swapping to USDT (Tether) from other tradeable cryptocurrencies such as BTC, ETH, XRP, and EOS. One should also note that you cannot find this feature from other cryptocurrency derivatives exchanges other than Bybit.
- Decentralized Finance
Decentralized Finance or "Defi" has recently become well-established in the financial sector. It offers a blockchain that is public and is an alternative to traditional financial services using smart contracts. But where does Stablecoins come into the picture? Stablecoins offer a more stable means of every transaction that is taking place in the Decentralized Finance System.
Types Of Stablecoins
There are four types of Stablecoins that you should know about:
By now, you know that most Stablecoins are pegged to currencies like the US Dollar. Other Fiat-backed Stablecoins are also pegged with EUR or GBP. You should have one unit of Fiat currency stored in the parent company's reserves, i.e., Tether and other popular Stablecoins.
Converting Stablecoins to cash means that a particular institution will send the currency that is stored in its reserves to your bank account. In turn, the Stablecoins that equates to the amount of Fiat currency will be removed from circulation.
There are also Stablecoins that are not pegged to a particular currency. In turn, they are collateralized to stable commodities like Gold. Commodity-backed Stablecoins can also be collateralized with certain metals, real estate, and of course, oil. One could say that investing in commodity-backed Stablecoins gives you a bit more flexibility as it allows you to invest in commodities.
Cryptocurrency-backed Stablecoins have tradeable cryptocurrencies as their collateral. Cryptocurrency-backed coins are also decentralized. In turn, every transaction that takes place in blockchains are secured and are fully transparent.
These cryptocurrency-backed coins also have higher amounts of liquidity. In turn, you can convert it quickly at minimal costs.
Algorithmic Stablecoins are Stablecoins that are non-collateralized. In turn, the supply comes from a controlled algorithmic pressing and, of course, smart contracts. The prices of these Stablecoins are also driven by supply and demand. If you're wondering where the supply of these Stablecoins comes from, it comes from an algorithm-based model called seigniorage shares.
As the price of this Stablecoin increases, the algorithm will issue coins until the supply and demand achieve equilibrium. If it decreases, the supply will be reduced until the supply and demand also achieve balance. The algorithm should keep the price of this Stablecoin stable by doing these two things.
Tether or USDT is a Stablecoin that is backed by a Fiat currency. For every one USDT, you should have a subsequent one Dollar pegged to it. It is the most common and popular Stablecoin, and it even surpassed Bitcoin (BTC) as the most traded currency recently in 2019.
Should You Invest In Stablecoins?
There are a lot of reasons why you should invest in Stablecoins. Stablecoins can come in handy whenever you are dealing with a volatile asset like Bitcoin. Converting Stablecoins is swift and easy. Meanwhile, converting it back is also incredibly seamless, given that it is the ideal scenario or situation.
Stablecoins are low-risk and stable. So, it shouldn't be difficult to form a diversified portfolio of investments. Plus, these assets may appreciate while still being low-risk for a certain period or even long term. This scenario is especially true for commodity-backed and cryptocurrency-backed Stablecoins.
Essentially, Stablecoins are a decent investment if you play it right and you know what you're doing. The potential of these Stablecoins is undeniable and Tether overtaking Bitcoin as the most traded currency is a testament to that potential. It also mixes blockchain technology with much-needed stability, making it a no-brainer for certain transactions in the crypto ecosystem.
Without a doubt, the future is bright for Stablecoins. But will it succeed in revolutionizing financial transactions? Well, that's for the experts and time to decide. It has proven that it can provide an alternative to combat hyperinflation issues and even those 1.7 billion unbanked individuals. There is no limit to the potential of Stablecoins and its use and purpose in the future.