Cryptocurrencies have seen a meteoric rise in popularity in recent years, with the total value of all coins now topping $160.6 billion. While this growth is impressive, it also makes cryptocurrencies highly volatile and risky investments. This volatility has led to the development of a new type of cryptocurrency known as a stablecoin.
What are stablecoins?
A stablecoin is a type of cryptocurrency that is designed to maintain a stable price. Unlike other cryptocurrencies, which can be prone to dramatic price fluctuations, stablecoins are backed by real-world assets such as gold, fiat currency, or other cryptocurrencies. This makes them less risky and more appealing to businesses and consumers who are looking for a more reliable way to conduct transactions.
How do stablecoins work?
Stablecoins are typically pegged to a fiat currency, such as the US dollar, or to a commodity like gold. This peg ensures that the value of the stablecoin remains relatively stable even when the prices of other cryptocurrencies fluctuate.
In a simple way, Stablecoins are usually backed by a reserve asset, which can be used to stabilize the price. For example, the popular stablecoin Tether (USDT) is backed by US dollars held in reserve. When the price of USDT falls, new tokens are minted and sold for dollars, which increases supply and pushes the price back up. Similarly, when the price of USDT rises, tokens are bought and destroyed, which reduces supply and drives the price back down?
The benefits of using stablecoins
There are a number of benefits to using stablecoins:
- Firstly, they offer a more stable and predictable way to conduct transactions than other cryptocurrencies. This makes them ideal for businesses and consumers who want to avoid the volatility of the cryptocurrency markets.
- Secondly, because real-world assets back them, stablecoins can be used as a reliable store of value. This makes them a good choice for investors who are looking to park their money in a safe asset.
- Finally, stablecoins can be used to hedge against the risk of other investments. For example, if you are holding a portfolio of cryptocurrencies and the price starts to drop, you can convert your coins into a stablecoin to avoid losses.
The downside of using stablecoins
There are also some downsides to using stablecoins:
Firstly, because they are pegged to other assets, stablecoins can be subject to the same macroeconomic forces that affect those assets. For example, if the US dollar weakens, the value of a dollar-pegged stablecoin will also fall.
Secondly, while stablecoins offer more stability than other cryptocurrencies, they are still relatively new and untested. This means that there is a risk that they could fail or be subject to manipulation.
Thirdly, because assets back them, stablecoins can be subject to government regulation. This could make them less accessible to users in some jurisdictions.
The different types of stablecoins
There are a number of different types of stablecoins, each with its own benefits and risks. The most popular type of stablecoin is the fiat-backed stablecoin. This is a coin that is backed by a reserve of fiat currency, such as the US dollar or the euro. Fiat-backed stablecoins offer stability and low risk, but they are subject to the same macroeconomic forces that affect the underlying fiat currency.
Another popular type of stablecoin is commodity-backed stablecoin. This is a coin that is backed by a reserve of commodities, such as gold or silver. Commodity-backed stablecoins offer stability and low risk, but their price is also affected by the price of the underlying commodity.
Finally, there are also crypto-backed stablecoins. These are coins that are backed by a reserve of other cryptocurrencies. Stablecoins that are crypto-backed provide stability and low risk, but the value of the underlying cryptocurrency also determines their price.
Here is the list of top 5 Stablecoins:
- Tether (USDT): Tether is a dollar-backed stablecoin that is pegged to the US dollar. Tether is one of the oldest and most popular stablecoins, with a market capitalization of over $65.93 billion.
- USDC (USD Coin): USD Coin is a dollar-backed stablecoin that Circle and Coinbase jointly manage through the Centre Consortium.
- Diem (formerly Libra): Diem is a dollar-backed stablecoin that Facebook is developing. While Diem has not yet launched, it has had more psychological impact than any other stablecoin.
- Paxos Gold (PAXG): Paxos Gold is a gold-backed stablecoin that is pegged to the price of gold.
- DAI (Dai): The Dai stablecoin is an Ethereum-based digital currency that is soft-pegged to the US dollar. The Dai stablecoin system is based on the Maker Protocol and is backed by ETH (Ethereum) as collateral.
How to buy and sell stablecoins
If you are looking to invest in stablecoins, there are a number of different ways to do so. The most common way to buy and sell stablecoins is through cryptocurrency exchanges.
Cryptocurrency exchanges are online platforms that allow you to buy and sell cryptocurrencies. Some exchanges only offer a few cryptocurrencies, while others offer hundreds. When choosing an exchange, it is important to consider the fees, the selection of currencies on offer, and the security of the platform.
Once you have chosen an exchange, you will need to create an account and deposit funds. Once your account is funded, you can then start buying and selling stablecoins.
It is also possible to buy and sell stablecoins through peer-to-peer (P2P) platforms. P2P platforms match buyers and sellers of cryptocurrencies directly, without the need for a third party. P2P platforms usually charge lower fees than exchanges, but they may be less secure.
Finally, you can also buy and sell stablecoins through brokerages. Brokerages are online platforms that allow you to buy and sell cryptocurrencies without the need for an exchange. Instead, brokerages act as middlemen, connecting buyers and sellers directly. Brokerages usually charge higher fees than exchanges, but they can be a convenient way to buy and sell stablecoins.
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Stablecoins are digital currencies that are pegged to a fiat currency, commodity, or other assets. Stablecoins offer stability and low risk, but the underlying asset also determines its price. There are a number of different ways to buy and sell stablecoins, including through exchanges, brokerages, and P2P platforms.
I hope this article was helpful in explaining what a stablecoin is. If you have any questions, please feel free to leave a comment below. At Signals Blue, we perfectly understand the concept of stablecoin and thanks to our cryptocurrency signals you will not have to go into this knowledge in detail.