crypto currency news

What Are Stablecoins and How Can Invest in Them?

While cryptocurrencies such as Bitcoin and Ethereum have disrupted the way many investors interact and think about money, traditional investors may opt to steer clear as prices can change drastically from one moment to the next.

Stablecoins, on the other hand, are less subject to volatility. Stablecoins are cryptocurrencies that are backed by an asset, most often a fiat currency. They maintain much of the appeal of other cryptocurrencies, however, allowing investors access to a new and evolving asset class.

Here’s what you need to know about stablecoins:

What are stablecoins?
Fiat-backed stablecoins.
Crypto-backed stablecoins.
Commodity-backed stablecoins.
How to use stablecoins.
How to make money with stablecoins.

What Are Stablecoins?
A stablecoin is a digital currency that is linked to an underlying asset such as a national currency or a precious metal such as gold. The main types of stablecoins include fiat-backed, cryptocurrency-backed and commodity-backed stablecoins.

Fiat-Backed Stablecoins

A popular stablecoin is Tether (USDT), the first stablecoin that came to market with both the widest adoption and largest market capitalization. While it is pegged one-to-one to the U.S. dollar, its solvency relies upon the strength of its reserves, which only include 3.87% of cash.USDC is another stablecoin backed by the U.S. dollar. It was launched in 2018 by Coinbase and Circle. These are centralized stablecoins, which means the stablecoin is held by an entity or exchange. In the case of USDC, this stablecoin is managed by Circle and Coinbase.

One of the dangers of stable coins is that they can be trusted to maintain a supply of dollars equal to the supply of stable coins. This can be seen as going against the concept of decentralization.

 

“With a centralized third party, the organization that created the stablecoin entity, you have to trust that they have the corresponding dollars they issued the stablecoins for,” says Mike Scanlan, co-founder and chief technology officer at CoinMover, a cryptocurrency ATM operator.

The concern is the third-party entity shaping the value of the stablecoin, Scanlan says.

Crypto-Backed Stablecoins

DAI is a decentralized, crypto-backed stablecoin. Maker, a smart contract platform built on the Ethereum network, backs and stabilizes the value of DAI through a dynamic system of collateralized debt positions, autonomous feedback mechanisms and appropriately incentivized external actors, according to a whitepaper from the Maker team.

This digital asset’s goal is to try to keep its value respective to the U.S. dollar and is maintained on the Ethereum blockchain network. This is done by allowing people to use their Ethereum assets to generate DAI on the Maker platform without an intermediary. This means anyone can help maintain the blockchain, which is not controlled by any one single person or entity.

Commodity-Backed Stablecoins

These stablecoins are backed by precious metals such as gold or oil. Some of the most well-known stablecoins in this category are Tether Gold and Paxos Gold. Commodity-collateralized stablecoins are more susceptible to price movements, but since commodities should increase in value over the long run, investors can buy and hold this asset for capital appreciation.

How to Use Stablecoins

One of the main ways to use stablecoins is to make quick and affordable payments or money transfers globally. Stablecoins provide the fastest way to transfer deposits or withdrawals between fiat currencies on cryptocurrency exchanges.

“Payment is one of the most powerful uses of stablecoins,” says Nemal Dalal, head of crypto at Coinbase.

The broker says that with Stable Coins, customers can send money anywhere in the world in a few seconds. Given that they are a stable currency, stablecoins provide an easy flow of payments, making it easier for businesses to send money safely to their employees.

Related Articles

Leave a Reply

Your email address will not be published.

Back to top button