Cryptocurrencies known as stablecoins have their value linked to another coin, commodity, or financial instrument. Many fear using prevalent cryptocurrencies like bitcoinmillionaire-pro.com due to their ever-increasing volatility. Stablecoins attempt to offer a solution to this situation. They create a less volatile token with a similar value for daily transactions and trading.
Stablecoins are currently a crucial part of the emerging category of goods described as Defi, or decentralized finance, which allows for the execution of transactions without the need for an intermediary like a bank or broker. Additionally, many stablecoins have some of the market valuations in the cryptocurrency market, including Tether and USD Coin.
Read ahead, to know more about these Stablecoins.
Types of stablecoins
1. Cryptocurrency-collateralized stablecoins
Stablecoins with cryptocurrency collateral is supported by other cryptocurrencies. Such coins are over-collateralized. This means that the value of cryptocurrency kept in reserves is more than the value of the coins issued because the reserve cryptocurrency may be subject to severe volatility.
2. Fiat-collateralized stablecoins
Stablecoins that are “fiat-collateralized” keep a deposit of fiat currencies, such as the dollar, as security for the stablecoin’s value. Other types of collateral might be commodities like crude oil or precious metals such as gold or silver.
3. Algorithmic stablecoins
Stablecoins that use algorithms may or may not have any reserves. The computer software that follows a predetermined formula is used to restrict its supply and demand. Their most significant distinction is how a stablecoin maintains its value using an algorithm instead of any commodity, currency, or metals.
Decrease volatility of the assets
Cryptocurrencies like Ether and Bitcoin experience significant volatility, sometimes minute-by-minute. A more stable asset can assure buyers and sellers that the worth of their coins won’t grow or fall sharply in the foreseeable future.
Easy movement of assets
Using stablecoins, one can quickly transfer fiat currencies, commodities, etc. Stablecoins are easy to store and transfer and don’t require a bank account. The value of stablecoins can be transferred directly around the world where some of the currencies may be difficult to find or if the currency is unstable.
Cheaper money transfer
Fiat currencies tend to charge hefty transaction fees, increasing ones spending. Users can transact money easily with a transaction cost of under a dollar when it comes to Stablecoins.
People can easily trade and transact stablecoins like Tether, USDC, etc., on different types of Bitcoin platforms.
What varies the value of stablecoins?
It is said that stablecoins should have equal value as the underlying crypto or fiat currency.
However, this isn’t guaranteed in practice because many factors can impact the value of a stablecoin:
- The market value of the assets backing the stablecoin (for example, if they decline in value)
- The government regulation around cryptocurrencies
- The level of demand for cryptocurrencies against fiat currencies (this will drive up the price of both types of cryptocurrency)
Is investing in Stablecoins a good idea?
Not much is known about the stablecoin market to know precisely what the future holds for them. But at this point, coins play a crucial role in preventing hyperinflation and market instability, lowering risks for investors, and boosting trust in cryptocurrencies. However, one can still say that stablecoins are a good investment choice.
Several stablecoins have yearly interest rates of 3% to 20%, which can produce passive income.
When other cryptocurrencies are experiencing extremely high volatility, users can convert their cryptocurrency into any stablecoin. Managing their exposure to fluctuating cryptocurrency tickers in this way which can help save money on taxes.
With the aid of stablecoins, investors can take advantage of the chance to trade, invest in, purchase, or keep crypto assets. Unlike transactions made through banks and other financial institutions, transactions with stable tokens can be completed in minutes and on weekends.
Stablecoins are likely to come up if one considers utilizing cryptocurrencies for purposes apart from investing or trading (such as lending, borrowing, or financing). But please note that not every stablecoin is the same. Depending on the type, they retain their values through various techniques and pose various risks in the market. Additionally, stablecoins are continuously under regulatory investigation as well.