What Are Stablecoins?
Aug 19, 2021
Cryptocurrencies like Bitcoin (BTC), Ethereum (ETH) and Ripple (XRP) are notoriously volatile– largely because blockchain technology and the crypto market are both fairly new. That said, while the Bitcoin network only launched in 2009, its market cap is already comparable to other markets and assets that have existed for over 50 years. Taken together, this means that massive amounts of money are gained and lost in the crypto space on a regular basis.
Stablecoins and stability
Stablecoins are issued in such a way that they are pegged to a more stable asset like fiat (usually USD) or a precious metal (usually gold) to avoid massive price fluctuations. The entity responsible for the creation of a stablecoin will set up a reserve where it will secure fiat or precious metals. This fiat or precious metal in the reserve is used as collateral for the stablecoin.
How are stablecoins used?
Like most cryptocurrencies, stablecoins are mainly used as a store of value and a medium of exchange. They also tend to be used by traders as a temporary relief from volatility and can also be used on decentralised exchanges (DEXs) for farming or liquidity provision.
Whilst maintaining a store of value, stablecoins are also used to quickly buy other cryptocurrencies when their prices suddenly drop.
Some of the most popular stablecoins include:
- Tether (USDT)
- USD Coin (USDC)
- TrueUSD (TUSD)
- Paxos (PAX)
- Dai Coin (DAI)
What is the difference between Stablecoins, Bitcoin and Altcoins?
Bitcoin is the oldest and most dominant cryptocurrency in the entire crypto industry. Bitcoin is often referred to as the crypto ‘safe haven’. Although Bitcoin is not the fastest or most cost effective when it comes to payments, it is considered to the ‘standard’ of the crypto space.
An altcoin or ‘alternative coin’ is a term used to describe any cryptocurrency that is not Bitcoin. The first cryptocurrency created was Bitcoin, therefore, every other coin that was created after it is referred to as an ‘Altcoin’. Some well known Altcoins include Ethereum (ETH), Litecoin (LTC) and Ripple (XRP).
Stablecoins are similar to Bitcoin and Altcoins in the sense that they are private, secure and transparent. Unlike stablecoins, Bitcoin and Altcoins are, however, not backed by an outside source like the US Dollar or gold. The main thing that sets stablecoins apart from the rest of the crypto market is their stability. While Bitcoin and Altcoins are considered extremely volatile, stablecoins remain stable. Stablecoins are predominantly used when investors feel the need to convert their coins to prepare for a dip in the market.
Always remember: Crypto trading is extremely risky due to the volatile nature of cryptocurrencies, you should never risk more than you are willing to lose.