In the fall of 2021, Bitcoin hit an all-time high. The price of the coin exceeded $67,000. Solana, Phantom, SAND and some other previously little-known altcoins rose by more than 10,000 percent. Against the backdrop of such impressive numbers, stablecoins look more than modest, and their role in the cryptocurrency market is not obvious to novice investors.
What are stablecoins
Unlike most cryptocurrencies, stablecoins maintain a truly Olympian calm in the raging ocean of the crypto world. Their exchange rate almost does not change even in the most difficult moments.
Stablecoins are called cryptocurrencies, the value of which is tied to the value of another asset: fiat currency, commodity or other cryptocurrency. Depending on the collateral asset, fiat-backed, crypto-backed and commodity stablecoins are distinguished. Unlike other cryptocurrencies, stablecoins are not intended for speculation.
Commodity, fiat, decentralized
The value of commodity stablecoins is pegged to precious metals or oil and highly dependent on fluctuations in the price of the collateral asset. At the same time, they are more predictable and in the long run will rise in price in sync with goods.
Tether (USDT) is the first and still the largest fiat-backed stablecoin. The cost of the token is pegged to the US dollar at a ratio of 1:1. In practice, it is not possible to achieve full parity, but USDT price fluctuations usually do not exceed tenths of a percent. Unlike classic cryptocurrencies, each fiat-backed stablecoin is backed by an issuing company that bears full responsibility for the issuance and operation of the coin.
Fiat-backed stablecoins are the most understandable and most trusted by the average user.
Crypto-backed stablecoins are completely decentralized. The stability of the coin is maintained by technical means using special algorithms. Unlike coins from the first two groups, which can be considered as tokenized physical assets, crypto-backed stablecoins are not controlled by issuing companies. In fact, the fate of these assets is in the hands of the market, and it can be quite dramatic.
How stablecoins are used
The most famous and in demand on the market are fiat-backed crypto assets. This is due to their similarity with already familiar electronic systems, trust in base currencies and ease of use.
The use of dollar stablecoins has much in common with the use of collateral currency in the real economy. The practice of converting savings into less risky or stable assets for protection during times of social and economic upheaval is as old as the history of the economy. This is the only effective way to protect your investments from depreciation and ensure their physical transportability.
Accordingly, stablecoins are widely used to protect capital during periods of particularly high volatility in the cryptocurrency market, as well as to fix profits. Many traders change TRX to USDT by closing trades overnight to limit potential losses.
Stable digital coins are convenient to use for everyday payments. Their exchange rate changes slightly, which minimizes the risk of losses for the participants in the transaction. Yes, if Laszlo Heinitz had paid for pizza in USDT on May 22, 2010, this event would hardly have become legendary.
Stablecoins are easier and safer to use than base currencies. Cross-border payments are completed in minutes and cost less than classic bank transfers. This simplifies the circulation of capital and stimulates the development of the economy. Moreover, banks have already become interested in the possibilities of stablecoins, and in the foreseeable future, a massive emergence of state-owned cryptocurrencies is expected.
Stable digital coins pegged to stable fiat currencies are already being used to hedge against hyperinflation of sovereign currencies. This has been implemented in Venezuela and may become common practice in the future.
Cryptocurrencies can be bought with fiat money, but this method of depositing funds is not supported on all exchanges. The use of stablecoins simplifies and reduces the cost of buying cryptocurrencies, since the commissions when using digital coins are noticeably lower.
Dollar stablecoins can be used as an intermediate link in exchange transactions if the XVG to ZEC trading pair is not supported on the exchange.
Are stablecoins a good investment?
When evaluating the investment attractiveness of any asset, one should first of all proceed from one’s own goals. If you set yourself the task of preserving capital, then stable digital coins will suit you.