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What is a stablecoin?
What is a stablecoin?
May 6, 2020 by
In short, what is a stablecoin? A stablecoin is a cryptocurrency backed by a reserve asset such as dollars, euros, gold, oil… in order to maintain a stable price and backup. Its main goal is to fix the volatility problem of the cryptocurrency market.
Similarly to other currencies, Bitcoin can only be traded as a pair. Which means it fluctuates according to the other currency.
And like any new market, the decentralized cryptocurrencies world is still in the early phases. Which implies higher volatility, for some simple reasons:
- Quantity, since we have a low supply, in comparison to fiat currencies like GBP, the price is more prone to get influenced by not so big movements. If someone sold $500 million in gold, it would be barely noticeable, but if you sell $500 million in Bitcoin it can crash the prices significantly.
- Speculation, since investors are constantly betting for them to go up or down. Their behaviour affects the market and makes rather drastic movements
- They are purely digital since it is not backed by any physical thing like other currencies or commodities, the price is set entirely by the laws of supply and demand. It depends on how many people want to buy bitcoin right now.
- The media, as a small market full of speculations, investors are always waiting for the next news to crash or boom the market. More so if the news sources are not so credible.
Types of stablecoins
There are many types of cryptocurrency, each with different functions and purposes. Stablecoins sit at an increasing number of 200 this year. You can basically choose the one it fits you the most.
Here are three of the most important 4 different types:
- Fiat backed (1-1 ratio), these are the ones backed by common currencies like USD, Euro, Swiss Franc. examples: TrueUSD (TUSD), USD Tether, Gemini Dollar, and Libra (note that Libra is in a grey area to be considered a stablecoin)
- Commodity-backed, these are pegged to commodities such as precious metals (gold, silver…) or even oil. For example DGX.
- Crypto-backed, using smart contracts its collateralized by another cryptocurrencies or portfolio. examples: Havven, DAI…
What if we could take the main risk out of the equation?
So essentially, stablecoins are a way to exclude volatility and enjoy all the true benefits of the crypto market. They work like this: for example, Usdt Tether, a popular stable coin paired to the Us dollar maintains the price of 1 USD, so each usdt is worth $1. This means that if Bitcoin is priced at $5000, you can buy 5000 usdt that equals the same amount. Now that you own the stable coin, you are bullet-proof to any Bitcoin price movement. It doesn’t matter if it goes up to $6000 or even down to $4000, as long as you have the stable coin, your USD is intact. The true benefit comes from high volatility periods. Let’s say you bought tether at $5000, and Bitcoin went down 10% in the next 2 hours, if you buy bitcoin again you saved yourself $400.
Now, which is the difference between this and going back to regular USD? two main things: speed and fees, in trusted exchanges you can easily change to tether in a matter of seconds, and the fees are lower compared to buying USD.
In summary, a fixed price in which you can trust as a “safe haven” to avoid violent fluctuations and take advantage instead. There are many intelligent moves as traders regarding stable coins, especially when backing up huge amounts. A lot of big companies and exchanges use stable coins to secure their big storages.
Which are the most popular ones?
For usage and overall volume, some stablecoins stand out more than others. This pie chart represents the top stable coins by market share in 2020.
Some major companies like JP Morgan and the blue giant: Facebook are starting to dig deep into the stable coin concept. The JPM Coin is a clear sign that cryptocurrencies have a great opportunity in future finances. Also, Facebook’s coin announced in late 2019 Libra which is supposed to be pegged to a basket of fiat currencies.
Many major companies and financial institutions are getting on board, which is a clear sign of stablecoins gaining a place in the financial economy. Especially in the Decentralized Finances (DF).
Stablecoins will undoubtedly play a vital role, but will they change the world?
Cryptocurrencies, in general, have many potential benefits over the classic currency. As we know, these are some of them:
- Faster transactions: For not having any intermediaries and waiting periods, transactions occur quicker than most common traditional currencies.
- Lower fees: for their peer-to-peer nature stablecoins have cheaper transactions, which gives it the main strength when it comes to big movements.
- Borderless payments: Transactions can freely occur online, they can’t be blocked censored by any country.
On the other hand, benefits specifically about Stablecoins are in most part because of their stability on the digital payment world. Most cryptocurrencies are too volatile to be able to act as a proper payment method on e-commerce stores or any purchase. Additionally, stable coins can be used as a base currency when trading, and transfer those gains directly to your bank account using some platforms.
The brilliant thing about all this is having an alternative tactic for big swings. This way, new investors can take a huge advantage and thrive in a rather uncertain market.
As can be seen, stablecoins are not going anywhere, anytime soon. The crypto future is surely painted with stable coins on the picture. It is the needed bridge between the “real-world” of fiat and crypto. It solves the volatility problem and gives a bigger range of alternatives and moves available for investors and traders.
Now that you know precisely what is a stablecoin? Take a more informed and less risky approach into the crypto world. Bitblinx is a great way to start investing now.
Wherever you are a day trader or a long term investor, Stablecoins are the safe heaven to enjoy the best of both worlds. The future is certain, but the direction is clear.