So you’ve heard of Bitcoin? But what about stablecoins?
Stablecoins are often used as portfolio balancers and safeguards in Australia, and have gained popularity in the past few years.
For those interested in getting started with cryptocurrency, Tether (USDT), Binance USD (BUSD) and Paxos Standard (PAX) are some of the most popular stablecoins on the market.
Are stablecoins better than Bitcoin? How can stablecoins add value to an investor’s portfolio?
Stablecoins are inherently “stable”
Stablecoins are digital currencies that offer a higher level of stability for investors.
A stablecoin is a cryptocurrency that is anchored to another asset or benchmark, such as the US dollar (USD) or gold. This means the price of the stablecoin is not affected by price volatility associated with cryptocurrencies, but is determined by movements in fiat markets.
Stablecoins, as their name implies, are inherently “stable” and regarded as a valuable store of value or a transnational currency. In fact, stablecoins can be used for payments or to trade for other cryptocurrencies at a low cost.
Many central banks around the world are exploring the use of government-backed digital currencies (CBDCs) backed by their own currencies.
With blockchain technology, stablecoins could be used alongside traditional currencies, or in some cases replace them, as a way to benefit from the added security and efficiency provided by the technology.
In addition to traditional payments, stablecoins can also serve as a “gateway” into crypto capital markets, and smart contracts can be used to facilitate automated escrow payments.
As a result of decentralised finance (DeFi) and the advent of digital currencies as legitimate assets, there has been a significant increase in the supply of stablecoins globally.
Key Things To Know About Stablecoins
In November 2021, there were over 200 stablecoins in existence. The total supply of stablecoins surpassed US$100 billion.
As a private sector alternative to central bank digital currencies (CBDCs), stablecoins are here to stay, such as Diem (previously Libra), a Facebook-backed company using these cryptocurrencies to transform payments and other financial services.
In spite of some setbacks, some experts believe stablecoins will play an important role in both cryptocurrencies and finance markets in the future.
Types of Stablecoins
Stablecoins can be divided into three types, which are defined by their collateral structure, or “what they are backed by”. Here are some examples:
Fiat-collateralised Stablecoins
Fiat-collateralised stablecoins are simple stablecoins that mimic fiat currencies, such as the US dollar and euro. For each stablecoin, there is a fiat currency in a bank account.
When the cryptocurrency market is volatile, many investors will choose to park their profits in stablecoins to keep as much profit as possible while reducing losses if the market dips significantly.
Stablecoins with fiat collateral include Tether (USDT) or USD Coin (USDC).
Crypto-collateralised stablecoins
With this version of stablecoins, other cryptocurrencies are used as collateral, such as Ethereum. This way, stablecoins are more decentralised than fiat-collateralised stablecoins, since they are all conducted on the blockchain.
The collateral for crypto-collateralised stablecoins is often overcollateralised to help reduce price volatility risks.
Dai (DAI), a stablecoin created by MakerDAO, is a crypto-collatered stablecoin.
Commodity-collateralised stablecoins
Commodity-collateralised stablecoins are usually more susceptible to price movements than asset-collateralised stablecoins. The tendency of investors to buy and hold commodities for capital appreciation is due to the fact that commodities appreciate over the long term.
On CoinSpot, you can find commodity-collateralised stablecoins like Gold Standard (AUS) and Silver Standard (AGS).
Stablecoins vs Bitcoin: Comparison
Stablecoins and Bitcoin both serve different purposes, and comparing them is unnecessary.
The Bitcoin payment system typically uses peer-to-peer technology, which can be used to make cross-border payments within a matter of seconds or minutes.
Stablecoins, on the other hand, are paired 1:1 with fiat currency, so they aren’t necessarily viewed as an investment. Instead, stablecoins’ utility is seen more as a safeguard against market volatility or a way to move between positions.
In the future, stablecoins, along with crypto pillars such as Bitcoin, will continue to exist as integral components of the cryptocurrency ecosystem based on the wide adoption of stablecoins.
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Author
Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.
