Bitcoin and other cryptocurrencies are extremely volatile, especially compared to conventional financial instruments like stocks and bonds. This volatility plays a central role in the attractiveness of crypto to investors. Of course, you can lose money on any coin or token, but you can also become a millionaire overnight. There is, however, a subset of cryptocurrencies designed to remain stable – to provide value that does not fluctuate. They are called stablecoins and they play an important role in the cryptocurrency markets.
Although stablecoins have yet to gain as much mainstream attention asWhere , they have become an integral part of the crypto ecosystem, offering a distinct set of uses that benefit investors, speculators, and other enthusiasts. Below, we’ll take a look at what makes a stablecoin a stablecoin, how they’re different from other cryptocurrencies, and how people use them today.
Are stablecoins a cryptocurrency?
A stablecoin is a cryptocurrency with a twist. Instead of being “operated” by an open, distributed network of computers performing a combination of math and record keeping, a stablecoin gets its price from the value of another asset. In short, a stablecoin is linked to another underlying asset.
What are the main stablecoins?
The most important stablecoins are those used for trading on crypto exchanges. These include: attached, the most popular stablecoin, which is generally in the top five of the highest market caps for cryptocurrencies; us dollar coin, or USDC, a open source project managed by a consortium called Center; and binance USD, a stablecoin issued by Binance, the world’s largest crypto exchange.
What can you do with a stablecoin?
The main use of a stablecoin is to facilitate transactions on crypto exchanges. Instead of buying bitcoin directly with a fiat currency, like the US dollar, traders often exchange a fiat for a stablecoin and then execute an exchange with the stablecoin for another cryptocurrency like bitcoin or ether.
In this way, stablecoins are sort of like poker chips for crypto exchanges. The most traded stablecoins are each associated with a specific exchange: tie with Bitfinex; USD coin with Coinbase; binance USD with Binance.
Although advanced crypto traders can use stablecoins for a variety of purposes including staking and loans, most beginners use them to ease trading costs. This is because many exchanges do not charge for exchanging US dollars for a stablecoin. Coinbase, for example, does not charge any fees on USDC transfers in US dollars. If you are looking to liquidate your bitcoin quickly at a certain price, you can transfer it to a less volatile entity like the USD coin or tether.
In fact, tether currently accounts for over half of all bitcoin traded for fiat or stablecoin, according to CryptoCompare, a global data provider in the cryptocurrency market.
Another use of stablecoins is remittances; that is, transferring funds across international borders. Digital floor, a ground-linked stablecoin, Peru’s national currency, launched on the Stellar blockchain in September. It can be exchanged between individuals in different countries without incurring the considerable fees charged by third parties for cross-border money transfers.
And it is in this use case that the seed of one of bitcoin’s most grandiose potential goals lies – namely, to provide relief to populations prone to rapid inflation and who could benefit from a currency’s transfer of funds. troubled local to a stablecoin. (As long as the stablecoin is not pegged to that local currency, it would theoretically be insulated from the region’s inflation.)
Are all stablecoins pegged to a national currency?
In the same way that the US dollar serves as a reserve currency for countries around the world, the most popular stablecoins are currently pegged to the US dollar. For example, a single unit of tether, USD coin, or USD binance is each worth around $ 1.
But the underlying asset does not necessarily have to be a national currency. The asset could be a commodity like gold (as with kitco gold), an algorithm (dai) or even another cryptocurrency like bitcoin (littleUSD).
How are stablecoins different from traditional cryptocurrencies?
A traditional cryptocurrency has no central control – it is ruled by the masses. A stablecoin is different in that it is issued and governed by a central authority. When you buy one, you agree that the issuer of that coin has a sufficient amount of the asset to which it is attached.
The reserve of assets, which gives stablecoin its value, also serves as collateral. As long as the value of the assets is stable, the price of stablecoin is stable. However, since there is no US regulations in place to monitor stablecoin reserves, this equation is based on trust. You have confidence that the reserve exists and that it is correctly valued.
And sometimes that trust is broken. In February, Tether (the company issuing tether stablecoin), as well as the affiliate exchange Bitfinex, paid $ 18.5 million fines after New York Attorney General Letitia James ruled against them in a case involving the $ 850 million cover-up who has disappeared. Tether and Bitfinex neither admitted nor denied the wrongdoing in the civil settlement.
“Bitfinex and Tether recklessly and illegally hedged massive financial losses to maintain their program and protect their bottom line,” said Attorney General James. âTether’s claims that its virtual currency was fully backed by US dollars at all times was a lie. These companies masked the real risks investors faced and were exploited by unlicensed and unregulated people and entities operating in the darkest corners of the financial system. “
Do i need a special bank account or a crypto wallet to buy stablecoins?
You don’t need a special bank account to buy stablecoins, and that alone could make them attractive to unbanked and underbanked populations. But you need a crypto wallet to buy, sell, trade, and store stablecoins just like you do with bitcoin. And not all wallets support all coins (they’re all software, after all). The trick here is to make sure that the crypto wallet you choose supports the stablecoins you want. For example, by Trezor and Big Book the latest wallets both support tether.
Where can I buy a stablecoin?
Stablecoins are typically purchased on cryptocurrency exchanges. You can buy them the same way you buy any other cryptocurrency. Just check the exchange to make sure it supports the stablecoin you are looking to get.