Cryptocurrencies are now seeing rapid development. The Cambridge Centre for Alternative Finance claims that the proportion of worldwide crypto investment has grown from 35M in 2018 to 101M in 2020 is a significant increase.
Although stablecoins are still a tiny portion of this developing industry, their importance and usage are fast rising. With a market capitalization of just around $ 25 billion, they are now backed by more blockchain service companies than before.
What Are Stablecoins?
Cryptos that is backed by a physical asset, most commonly a fiat currency, are called Stablecoins. In some other cases, commodities such as gold or other things can support stablecoin to keep the price stable.
They’re made to maintain a constant value in the exchange rate to which they’re “adjusted.” It explains that a stablecoin linked to the US dollar will constantly be worth about $1. For example, a well-known stablecoin, Tether USD, may have rapid price instability, but the underlying asset’s value will seldom surpass +/- 2%. The coin price is kept stable by the rules that the backer has sufficient assets and is acting openly and honestly. Also, always check the stablecoin’s price from authentic sources like The Top Coins, Cointelegraph, etc. Even though stablecoins are part of cryptocurrency, coins like bitcoin, altcoin, or stablecoins have their own different natures. Better do your research about stablecoins vs altcoins vs bitcoin to understand more and clearly understand the differences.
Types of Stablecoins
There are four major sorts of stablecoins that you should be aware of. First, let’s take a closer look at each form of stablecoin.
Commodity Backed Stablecoins
These stablecoins are usually backed by several replaceable assets, such as precious metals. Gold is the most often traded commodity. Moreover, real estate, oil, and other valuable metals are frequently used as commodities. Thus, commodity-backed stablecoin investors generally own a tangible item with genuine practical value. This is unusual for most digital currencies.
Fiat (Real Money) Backed Stablecoins
The most popular sort of stablecoin on the marketplace is this one. Mostly, they are backed by currencies like GBP, USD, EUR, etc, A 1:1 ratio is used to support these stablecoins. So one stablecoin, for instance, is worth the same as one currency (EUR, USD, or GBP). This is analogous to money that has been deposited or saved in a bank.
Crypto Backed Stablecoins
Other cryptocurrencies are used to back this sort of stablecoin. This form of stablecoin has the benefit of being more autonomous than different types of stablecoins. To decrease instability concerns, these stablecoins are generally over-centralized. As a result, they can tolerate market changes, resulting in lower overall instability.
These stablecoins have no backing. To manage the supply of stablecoins, they employ a programmatically controlled technique. As demand grows, additional stablecoins will be created. If the coins trade at a low enough price, the circulating supply will be decreased.
5 Facts To Know About Stablecoin
If you’re considering purchasing stablecoins, here’s what you should know:
Less Volatility Than Others
Stablecoins, as the name implies, are stable. Therefore, Stablecoins’ prices will not fluctuate drastically like the pricing of other digital currencies. Except, of course, something catastrophic occurs to the commodity to which they are linked.
The disadvantage is that you may skip out on the protracted possibility for big profits; for many investors, this is one of the most appealing aspects of cryptocurrencies. For example, whereas Bitcoin has grown over 5,000% in the last five years, the stablecoin Tether is still worth $1.
Making A Bridge Between The Digital Currency With Real World Currency
Stablecoins can serve as a link between two realms that were not meant to coexist: digital currencies and conventional banking. As a result, they may be used to lock in profits from cryptocurrency investing or as a safe haven if traders anticipate a market slump. They also simplify the process of transferring money to cryptocurrency platforms. Many platforms lack the bank ties required to enable conventional money transactions, but they can and do take stablecoins such as Tether.
Lastly, stablecoins can simplify, accelerate, and reduce transactions and funds transfer costs by utilizing a new technology known as blockchain rather than the standard financial system.
It Still Has The Risks
Don’t believe that since stablecoins have lower instability, you’ll be likely to escape all the issues associated with cryptocurrencies. Your account or platform, for example, may still be compromised. If this occurs, recovering your funds – even if they are stablecoins – would be very hard except if the system is protected.
If you store your stablecoins on an exchange in a regulatory account, you must evaluate what would happen if the exchange collapses or goes bust. Your funds will be protected by the FDIC up to $250,000 if they were in a bank account. Stablecoins do not always provide this level of security.
Lastly, make sure that the stablecoin is adequately collateralized. Then, if there is a run on that currency, everyone should be able to payout at the same time. Regrettably, this isn’t always the case.
Scope of Earning Interest
One of the most enticing features of stablecoins is that they provide significantly greater rates of interest than a savings account. On stablecoin reserves, a number of prominent cryptocurrency platforms pay significant interest rates, ranging from 5% to 10% or above.
By leasing your money out by decentralized finance (DeFi), platforms may pay such high rates. In addition, debtors placed assets as security for the loan, which should provide you with some safety. However, if there is a rapid economic downturn or a large number of individuals fail, It needs to be seen whether there is enough safety in place.
Future Of Stablecoin
Government-issued collateralized stablecoins may be seen in the future as countries gravitate toward central bank digital currency (CBDCs). However, the government may reserve full rights to such currencies. Therefore, if you prefer decentralized tokens, a crypto-backed stablecoin is an option.
Bitcoin and Ethereum, the first decentralized cryptocurrencies, are still battling to acquire widespread market acceptance. A stablecoin backed by money, on the other hand, has a higher chance of being embraced as something the public can trust and embrace. Stablecoins can be accepted as digital equivalents of fiat money.
Is Stablecoins Really Stable?
How reliable are these Stablecoins, though? First and foremost, they are only as stable as their underlying asset — and both currencies and precious metals, particularly real estate, may vary in value.
Furthermore, the prices of stablecoins regularly fluctuate from their underlying assets, owing to fluctuating trade volumes.
Aside from volatility, it is also critical to be cognizant of governance. Unlike other decentralized cryptocurrencies, the reserve of underlying assets must be maintained by a third party. As a result, the stability of stablecoins is dependent on both governance and volatility.
If you’re interested in investing in stablecoins, you first need to learn about blockchain technology. Stablecoins are not that volatile compared to other cryptocurrencies, and they may assist you in reducing risk to some level. Nonetheless, to stay financially savvy with your investments, be sure to conduct all of your homework ahead of time.