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Stablecoins 101: Everything You Need to Know

If you have ever come across the term ‘stable coin,’ you may be wondering what it is and how it is used in the world of cryptocurrency.

If so, you have landed on the right page! This article will tell you all you need to know about this currency. Is it actually as ‘stable’ as it sounds? Let’s find out.

What Is A Stable Coin?

A stable coin is another form of digital currency and is pegged to a reserve asset such as the U.S dollar or gold, also known as real-world assets. Stablecoins are not as prone to change as compared to other cryptocurrencies such as Ethereum (ETH) and Bitcoin (BTC).

Stablecoins do, however, tend to be more stable than other cryptocurrencies as their value does not fluctuate so much.

How Do Stablecoins Work?

A stablecoin is pegged directly to a real-world asset. Therefore, should the value of the real-world asset that it is tied to change, so does the value of the stablecoin.

Stablecoins can also be tied to physical assets such as gold or real estate.

What Are The Most Common Uses of Stablecoins?

People use stablecoins for a variety of reasons, such as:

To Earn Interest

Your money does not earn a lot of interest when it is sitting in the bank. Therefore, investing in stablecoin is a good way to use your money, and the chances of earning interest are much higher than it would be at the bank.

Transferring Money

It is far cheaper to send money this way, and sending a million dollars using USDT (Tether)  could have less than a one-dollar transfer fee.

Save and Trade Assets

The beauty of owning stablecoins is that they do not need to be in a bank account, and their value can be easily sent anywhere in the world. This is also a bonus if you want to send them to a location where the currency is unstable.

More Stable Than Regular Crypto

A stablecoin is less volatile than other cryptocurrencies such as Bitcoin. The value of a stablecoin is less likely to fluctuate as they are far more predictable than other types of currency where the value can rise or crash suddenly.

What Are The Most Common Stablecoins?

There is more than one type of stable coin, and they all work in different ways. Let’s take a look at the different types available.

Fiat Currency or Physical Assets

As discussed above, stablecoins can be pegged to reserve assets like the U.S dollar or physical assets such as gold or platinum.

Once the stable coin is pegged, it shares the same value as the chosen asset. 

Fiat-backed stablecoins are the most popular and were the first on the market. They are managed by specific entities which back them up with real cash or equivalents. Fiat-backed stablecoins include the following currencies:

Crypto Stablecoins

When pegged to another cryptocurrency, that particular crypto essentially becomes collateral. This means it will have coins that are locked away to ensure it can become pegged. Crypto stablecoins are more volatile than using fiat currency or physical assets as the ratio is never equal. Crypto-backed stablecoins include:

  • DAI
  • Haven

Algorithmic Stablecoins

This kind of stablecoin does not rely on other currencies such as fiat or crypto for collateral. The market cap of algorithmic stablecoins relies on how much the price fluctuates.

For example, if the price decreases, the total supply will reduce to ensure the price increases. Similarly, when the price increases, more tokens are added into circulation to ensure the price drops down again. Algorithmic stablecoins include:

  • Ampleforth (APL)

What Are The Best Stablecoins To Hold?

Fiat-backed stablecoins such as USDT are probably the best stablecoins to hold as their value is less likely to fluctuate than other options. 

Fiat currency such as USD Tether is popular as it is backed by the value of the U.S dollar. While the value of the dollar fluctuates on a daily basis, it only moves slightly, so there is less risk involved.

Is Bitcoin A Stablecoin?

No, Bitcoin is not a stablecoin. While Bitcoin is a popular choice of cryptocurrency to purchase, it is a lot more volatile than a stablecoin and can increase and decrease rapidly in the space of a few hours.

A stablecoin, on the other hand, is much less volatile and represents the price of real-world assets. For example, let’s say you have 1,000 USDT (Tether) – this is equal to $1,000 and will stay the same value.

Are Stablecoins Are A Good Investment?

Stablecoins can be a good investment as there is a wide range of currencies to invest in, and they all have different ways in which they work. 

However, it should be noted that the term ‘stable’ often means that your return is not going to be as great as it would be using other cryptocurrencies that are typically more ‘risky’ or volatile.

However, you are more likely to gain interest by investing with stablecoins as opposed to using a bank. Therefore, if you are looking to make a profit from cryptocurrency, this may not be the best choice. 

Final Thoughts

Stablecoins are a popular form of cryptocurrency, pegged against reserve assets such as the U.S dollar and physical assets such as gold, platinum, and real estate.

While investing in stablecoins is a good idea, it must be noted that they are the less risky choice when it comes to cryptocurrency, which means you are less likely to make a profit.

However, stablecoins are just as described and are the more ‘stable’ option if you want to invest without too many risks. We hope this article has been helpful in explaining all you need to know about stablecoins.

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