In the current cryptocurrency market today, stablecoins are like altcoins that have obtained a fixed price over the years. Because of how valued these coins are, they are categorized as coins that are stable, hence the name “Stablecoins”. These stablecoins have their equivalents in USD; meaning that they are well recognized in the coin market. Coinmarketcap has recorded that there are currently over 2,200 coins, including the new coins that have just entered the coin market. We all know that almost every coin starts with basically no value, but with time they become valuable in the coin market. For instance, people are rushing to get Bitcoin today; but the same Bitcoin was given to people for free when it was newly launched. A good example of a coin that later became a stablecoin is Ethereum. When it was first launched, its value was quite small, but today if you manage to get just 1 Ethereum, you will be celebrating. Even though we are going to look at a detailed stablecoins review, you should also know that a lot of coins are quite unstable. Let’s get started.
What Is Stablecoin?
Stablecoins are cryptocurrencies that try to peg their value to external forces or stable reserved assets like USD or gold. We all know that the price of cryptocurrencies varies a lot because of so many factors that make the crypto market volatile. But over the years, stablecoins have been considered to be like gold or even like the US dollar; this is in the value of these coins. They are called stablecoins because their price has gained some level of stable range in the crypto market. https://twitter.com/saylor/status/1463506837379158025?ref_src=twsrc%5Etfw
Top Stablecoin Tokens by Market Capitalization
|USD Coin USDC||$0.9999||$36,819,862,963|
|Pax Dollar USDP||$0.9999||$945,547,103|
|Reserve Rights RSR||$0.03532||$464,774,323|
Table statistics from Coinmarketcap
How Stablecoins Work
By default, stablecoins are just normal cryptocurrencies but the difference is that they have a fixed price, hence the name stable coin. The prices of the cryptocurrencies that are involved in this fixed price category don’t usually have dynamic prices – meaning that their prices do not change frequently. As a result of this, people also see stablecoins as valuable coins which in turn have some level of value like gold and silver. Because the US dollar is the most recognized currency over the world, these stablecoins are measured in US dollar value. This is to ensure that their value is unique despite the country you are checking it from. Although more coins are aiming to be stable almost on daily basis, this depends on their value, popularity and number of active users. The main reason why some coins are stable is that people have demanded them over time and the price of the coins being sold to them remains almost in the same price range, hence giving these coins a significant value in the cryptocurrency market. On the other hand, central stablecoins are coins that need to be regulated; the cryptocurrency company reserves an amount of USD in their bank which will serve as collateral in case if anything happens to the price of the coins which seems to be stable. Some of these stablecoins such as Tether, demand some level of regulations to ensure that price fluctuations that will affect that coin are prevented. Although other stablecoins are not central, known as decentralized stablecoins, these coins achieve this regulation goal even when they are not involved in collateral. One example of such coins is DAI that uses smart contracts which are taken from the Ethereum blockchain to ensure the stability of their prices.
Types of Stablecoins
There are three major types of stable coins that we will be discussing in this guide, they are:
This is the type of stablecoin that uses other related cryptocurrencies to engage in collateral while trying to make their price stable in the coin market. One of the coins that is used in collateral is Ethereum (ETH). From the table above, we notice that the price of these coins that are rated as stable coins is either $1 or close to $1. This is to ensure that they have almost the same value in the general market. By this, you can now equate them with gold or silver in terms of monetary value. Some examples of coins that fall into the crypto-collateralized stablecoins are MakerDAO and Havven.
Here, almost every coin is produced in the same currency – this makes it the simplest type of stable coin. How these coins are circulated, originating from the production side and the usage side, is ensured by the company or person that issues the coin out. With this type of stablecoin, the price always remains stable, and the main reason is that these coins can be exchanged with another coin, as a buyer you can purchase it at a lesser price which will be less than $1. But while you can do this exchange with another coin, fiat-collateralized stablecoins now depend on the issuing party to regulate their prices because, without these issuing parties, the price will never be regulated. Some examples of Fiat-collateralized stablecoins are Tether USDT, TrustToken, USDC, PAX Circle and TUSD Gemini.
From the name, this type of stablecoins is quite different from other stablecoins and the reason for that is that there is no collateral involved in it. These types of stablecoins are mainly governed or regulated by the central bank of assorted countries. Examples of coins that fall in this category are Carbon and Basis.
How Stablecoins Can Affect The Price Of Other Cryptocurrencies
Cryptocurrencies aren’t affected by governments or by top global companies or by a country’s economic and political factors. Instead, cryptocurrencies are affected by the supply and demand as well as the cost of producing a Bitcoin through the mining process that is available in the cryptocurrency market; this is why cryptocurrencies are volatile. According to research, the supply of an asset plays an important role in determining its price; a scarce asset is more likely to have high prices, whereas one that is available in plenty will have low prices. Research also shows that some people have a national net worth through these cryptocurrency coins. For instance, less than 500 people in the entire globe own about 20% of all the Bitcoins in the entire cryptocurrency market. If BTC is to be converted to stablecoins, it will ultimately increase or decrease the price of other crypto commodities. The core reason why other coins are not stable is that they are not structured. From the types of stablecoins we discussed above, you will see that certain things ensure that these coins remain in their stable state for a very long time. If for instance, the collateral was to be removed, the price and value of the coins we call “stablecoins” will surely come down to be equal with other coins in the cryptocurrency market.
Reasons Why You Should Consider Stablecoins
Stablecoins serve as an inflationary hedge against losses in cryptocurrency trading; they help to reduce loss. Let’s assume that the market is undergoing correction or crashing, you can easily convert your cryptocurrencies to stablecoins to reduce or avoid losses.
Pros of Stablecoins
- Low fees
- Secure transactions
- Prices are regulated through fiat processes and companies
- Almost anonymous
- Require a third party for their transactions
- Almost every stablecoin demands an external audit
- Less return in investment (even over a long period)
If you are new to cryptocurrency, you should start your investment or trading with these stable coins, because they will help you to keep your original capital even when there is a major dip in the crypto market. Before venturing into cryptocurrency, you should be aware that coins are quite volatile; so, don’t put all your trust in one place or when investing in one coin. Even crypto experts still encounter huge losses. Even when you invest your money in stablecoins, you should be at least 50% sure that you will not lose the capital that you invested at the initial stage. So, you might like to begin your cryptocurrency trading with these stablecoins,and later when you have mastered the price fluctuations in the coin market, you can switch to trade other common unstable coins.