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What are Stablecoins?

Bitcoin is yet again surging in value, closing the gap to its previous all-time high. That's exciting, right? Absolutely, but not for everyone.

Bitcoin, while the most popular out there, is another example of a cryptocurrency that's victim to extreme highs and lows. It has use cases, of course, but lacks the kind of stability necessary for everyday sales and purchases. Stablecoins better fit that necessity.

Unlike other cryptocurrencies, Stablecoins attach their value to external assets, like the US dollar or gold. They rely on them for stability.

They're kind of like a hybrid between fiat money and cryptocurrencies, with great benefits from both. Keep reading ahead to learn more!

Stablecoin: An Answer to Volatility

Stablecoins are a cryptocurrency. But because their value is attached to a reserve asset, they get to skip the discomfort of extreme volatility. This means they maintain the same purchasing power as fiat currency over time and make transactions more secure and trustworthy.

However, while Stablecoins essentially nullify volatility, they also remove various potential investment opportunities. This mostly impacts short-term and day traders (i.e., arbitrage traders). These types of investors look for sudden drops and climbs in prices in order to buy or sell for a profit.

Stablecoins are available for sale and purchase around the clock, an important variable for day-to-day commerce. And, no matter the amount sent, transfers of wealth hover around a single US dollar. Best of all, there are no international barriers, meaning you can transfer to anywhere in the world.

Analyzing the Stablecoin Market

The Stablecoin market is determined by the collateral, the asset for lenders that functions as security. This can come in the form of fiat, crypto, and even algorithmic Stablecoins. The prior example for fiat mentioned the US dollar, represented primarily by Tether, or USDT. Other U.S dollar-denominated stablecoins include MakerDAO's Dai, Circle's USDC, and Gemini's GUSD.

Stablecoins that use crypto as collateral are another option. Of course, they have to deal with the volatility involved with the security. So, the amount necessary for equivalent value for the Stablecoin is skewed. You'd need much more of the crypto asset to represent the Stablecoin.

The third, and final, option for Stablecoins is the algorithmic type. Instead of using a reserve asset, it relies on an algorithm that operates on the blockchain to continuously monitor and modify the supply of the same Stablecoin. For example, if the value drops, the algorithm can automatically burn a specific amount of the Stablecoin to bring the price back up.

A Price-stable Cryptocurrency Option

Among all the different types of cryptocurrency currently available, the Stablecoin is considered the best at mitigating the ups and downs of crypto prices. It does away with price volatility and leans heavily towards pegging to the value of the collateral it represents. It has many of the benefits of cryptocurrencies, and all the day-to-day utility of fiat currencies.

Reach out if you're interested in learning more about adding Stablecoins to your personal finances. We'll help guide you from start to finish!

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