Cryptocurrencies such as Bitcoin and Ethereum dominate the headlines with breaking news about astronomical all-time highs and massive losses, but stablecoins usually stay out of the limelight.
Popular stablecoins such as Tether, USD Coin, DAI, and Binance USD are all among the world’s largest cryptocurrencies based on market capitalization, yet their role is largely underestimated.
Nevertheless, stablecoins play an important role in cryptocurrencies and are popular assets for investors and traders. So what exactly are stablecoins and why are they different from other cryptocurrencies?
What is a stablecoin?
A stablecoin is a form of altcoin in cryptocurrency that seeks to ensure price stability in the cryptocurrency market. Its value can be pegged to various assets, but its ultimate goal is to maintain a constant value regardless of fluctuations in the wider crypto market.
Many popular stablecoins, such as Tether and USD Coin, try to hold a $1 value as they are pegged to the value of the US dollar. This means that USDT and USDC are always worth $1, no matter how volatile the market is.
Many stablecoins are pegged to dollar values, but may be backed by other assets or precious metals such as gold. This works because the creator of the stablecoin can keep fiat currencies such as dollars or commodities such as gold as collateral to guarantee the value of the stablecoin.
As the oldest stablecoin of its kind, Tether provides a comprehensive history of the actual stablecoin. A look back at performance over the years since its introduction in 2015 shows that USDT’s value has remained largely unchanged, but history also shows that anomalies can occur.
Unsurprisingly, USDT’s price history has seen the price of Bitcoin, a cryptocurrency preprogrammed to become increasingly scarce over time, through the gradual halving of new BTC generated for miners. It couldn’t look any more different than history. With a maximum supply of 21 million bitcoins and no real-world assets pegged to them, we have seen the value of bitcoin fluctuate up and down in volatile ways.
In addition to varying levels of market performance, stablecoins are typically regulated in ways that decentralized cryptocurrencies are not. This, again, will help free the stablecoin landscape from the notorious levels of volatility experienced by the wider market.
But what is the difference between stablecoins and traditional cryptocurrencies for investors, and why are stablecoins so technically different from other stablecoins?
How are stablecoins different from other cryptocurrencies?
The world’s most popular cryptocurrencies like Bitcoin and Ethereum are known as free-floating cryptocurrencies. This means that it behaves similarly to a commodity, getting value from the market of supply and demand for the asset itself.
Their value is not linked to any other asset or algorithm, so they can experience significant price volatility.
This means that investors buy BTC, ETH, etc. in the hope that their investment will fluctuate significantly. However, stablecoins always remain equal in value to more traditional assets and offer a range of opportunities for investors.
market stability
Unlike traditional cryptocurrencies, stablecoins have no supply limits or fixed schedules. That is, they are paid based on the market economy and conditions. These assets are backed by collateral that helps investors protect against market downturns among more traditional cryptocurrencies.
For traders, this means that stablecoins can be a particularly useful asset, with significant trading volume seen in Tether at a time when short-term market declines are expected for assets like Bitcoin. Additionally, some exchanges, such as Bitfinex, require users to purchase Tether before converting their holdings into other assets.
Venture capital recruitment
Another key attraction of stablecoins is the potential influx of large amounts of venture capital money.
This may seem counterintuitive for VCs, but the lack of volatility means investors are unlikely to profit from buying stablecoins. The development of new business models related to the stablecoin market offers venture capitalists and individual investors better opportunities to invest and build profitable portfolios.
Reward Opportunity
There are also ways for investors to be rewarded for simply holding a stablecoin, and in many cases the asset can generate higher returns than traditional bans.
For example, USD Coin offers up to 4% return on staking, while other less common stablecoins like USDD can offer 8% staking interest.
Borderless low cost transaction
Another key advantage of stablecoins is that their infrastructure with fast processing and low transaction fees allows you to send money anywhere in the world without the hassle of converting fiat currency or paying large fees.
Speaking of low fees, it’s worth emphasizing that the cost of transferring huge sums of money is relatively small. for example, coin base Some individuals have reported transferring over $1 million in USD Coin with a transfer fee of less than $1.
Stability and market risk management
In summary, stablecoins provide stability to the entire crypto world in a way that traditional cryptocurrencies cannot match. Its low trading costs and traditional asset collateral mean it is an excellent tool for traders navigating volatile markets or needing a respite from a cryptocurrency downturn.
However, it is also important to emphasize that the stablecoin ecosystem is not completely risk-free. In the past, major stablecoins like Tether experienced controversy based on their asset stability.
While stablecoins can establish themselves as risk-free assets, they are certainly not immune to risk and may run into trouble during testing of the broader crypto ecosystem.
With this in mind, investors can seek solace in stablecoins and profit in ways traditional cryptocurrencies can’t match. However, as always, it is essential to stay vigilant in the notoriously unpredictable world of cryptocurrencies. By preparing for the unexpected, investors can be prepared when the unexpected happens.
