Are stablecoins good for crypto investors?
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So, there are a lot of questions regarding stablecoins in the crypto investors’ minds; as we know, the crypto ecosystem is constantly evolving, and a lot of new types of options are coming in for people to try their hands on. What is it? How does it maintain its price? Is it rewarding for crypto investors? And so on. The train of neverending questions will finally be answered in this blog. Sit tight, and read on…
What is a stablecoin?
Any cryptocurrency that leverages the value of a more stable asset like the US dollar or Euro to be less volatile is a stablecoin. Hence, the bottom line is that the risk associated with stablecoins is way lesser than other cryptocurrencies that are not pegged to any stable asset.
Power of stablecoins
The stablecoins derive their stability from traditional assets such as gold, fiat currencies, and commercial papers (short-term debt from corporate bodies). The basic concept behind this is that the stable reserves act as collateral as far as the stablecoins are concerned. So, the asset reserve is depleted by an equal amount each time stablecoin owners derive cash profit from their tokens.
Stablecoins that are available
In 2014, Tether(USDT), the largest and the first ever stablecoin saw its inception. Since then, traders buy Tether to fulfill various purposes. According to the official site, cash, cash equivalents, short-term deposits, and commercial paper account for roughly 85 percent of Tether’s assets. Because Tether owns USDT, Tether should have $1 per each stablecoin on hand.”
Circle launched USD Coin, another popular stablecoin, in 2018, which is linked to the US dollar and short-term US notes. According to Circle, treasuries have a circulating supply of $49 billion of the coin. Other popular stablecoins include Dai, Binance USD, and TerraUSD, but they have smaller market caps.
How to use stablecoins?
Stablecoins are used in the crypto exchanges to make the trades seamless. Consider the purpose of stablecoins as that of poker chips in the crypto exchanges. For instance, traders convert fiat into a stablecoin instead of directly purchasing Bitcoin using fiat money, such as the USD. Then, they exchange the stablecoin for other crypto assets, such as Bitcoin or Ether.
Some expert traders also use stablecoins for purposes like staking and lending. Many also use these coins to avoid the trading fee because when you exchange a stablecoin for USD or any other fiat currency, some exchanges might not charge a fee. Well, stablecoins are also used for remittances (SOL digital attached to the national SOL currency of Peru). This means these coins can be exchanged among individuals who live in different countries. The stablecoins make cross-border money transfer a less costly affair.
Is it good to invest in stablecoins?
These are basically niche currencies in the crypto landscape. They are not great for investment purposes. Instead, you can use them for digital transactions or if you want to convert digital assets into fiat currency and vice versa. The crypto market is subjected to extreme volatility. Hence, it is more convenient to convert Bitcoin or any other cryptocurrency into stablecoins attached with USDT or anything else. Now, you want money in exchange for the Bitcoin holdings you own; the process is time-consuming as you must enter your bank account and continue with the long-drawn conversion process.
However, let us go through the pros of investing in stablecoins:
- Since stablecoins hold their stability for a long time, they can be considered for long-term investments. Hence, even if the market takes a steep dip, investing in stablecoins can ease your losses. Note: This is not the case if the cryptocurrency market collapses once and for all.
- In fact, investing in stablecoins can help increase the decentralization of the exchange you are operating in. For instance, new investors who want to invest in Bitcoin are stopped due to the hefty price fluctuations. They can easily invest in stablecoins and wait for the right time to convert their assets into Bitcoin.
- It is always better to invest in stablecoins than to put your money into other high-risk digital currencies.
- Stablecoins offer utmost transparency as they go through regular audits.
Conclusion
Stomaching the fluctuations of the crypto market can be pretty overwhelming for some. Hence, investing in stablecoins such as Dai, Pax, and Gemini Dollar can be helpful for future.
