A Guide to Stablecoins
The cryptocurrency industry, although still in its infancy, is fast-paced, and the prices are volatile. It is still challenging to liquidate digital assets, converting them to cash for such things as making payments. Unlike fiat currency, crypto markets are truly global. Traditional banking systems are attempting to catch up with the speed of crypto innovation. It can be difficult to convert crypto into cash.
Within reason, fiat currencies tend to hold a steady and somewhat predictable value. This is not necessarily the case with crypto, nor is it easy to cash them in to make payments or remit to your bank.
Stablecoins are a crypto asset class with unique features. They help to solve the problems associated with price volatility and lack of acceptance. As such, they make it considerably more comfortable for both new enthusiasts and seasoned investors alike. Due to their versatility and dependability, they are often seen as the “comfortable” gateway to crypto markets.
What is a Stablecoin?
A stablecoin is crypto. However, the value is pegged to a stable asset on a one-to-one ratio. Both Tether and USDC stablecoins are good examples, as they are both pegged to the U.S. dollar, meaning the market price of either of them will always be very close to, or precisely, $1.00.
Other stable assets, including precious metals and certain commodities, may also be used to back stablecoins.
Stablecoins hold a reserve of the asset which backs it. This fact is the key to how the price remains steady. As such, stablecoins are more suitable for use as a payment vehicle. Many exchanges will convert stablecoins to dollars at 1:1 and arrange to have the proceeds transferred directly to a bank account for a low if any, charge.
The Multiple Benefits of Using Stablecoins
Stablecoins can easily be transferred between crypto and fiat markets. As such, stablecoins are not volatile, and they have a very high level of liquidity. One of the early stablecoins, Tether, has shown itself to be so stable that last year, 2021, more than three-quarters of Bitcoin trading was done using Tether.
This rate of liquidity brings consistent stability to crypto investors in what otherwise can be a very volatile market.
Stablecoins can do more. They are packed with several features and benefits, some of which are:
- Safe Haven Asset:
In the past, people have looked to gold or other precious metals as favored safe-haven assets. Although there will always be a place for gold, a stablecoin backed by this precious metal provides both the benefits of gold ownership as well as the additional benefits of increased liquidity, stability, and usability.
- Borderless Payments:
Since stablecoins connect to live, real-time crypto markets, remittances from those working abroad to family members remaining at home are less expensive, quicker, and more convenient.
- Paying Employees in Diverse Regions:
Remote working is becoming more common. This allows employers to access a global pool of employees. However, it does pose the problem of paying them. It makes a great deal of sense in our digital economy to pay remote workers with stablecoins.
- Access to Crypto Markets:
It is easy to transfer stablecoins to other digital assets should the decision be made to try DeFi applications or take part in an IEO (Initial Exchange Offering.)
Fiat Backed Stablecoins
As stablecoins are backed by fiat currency, exchanges and crypto platforms have a “two-way street” between crypto markets and traditional money systems. At this time, the United States dollar is the world’s reserve currency. As such, almost every nation bases its home currency on the dollar’s value.
Commodity Backed Stablecoins
Stablecoins can be backed by assets other than fiat money. Commonly backed stablecoins offer alternatives as many common commodities can be used, gold being the most popular. Gold has traditionally been a safe-haven asset for a very long time.
With the advent of digital capabilities, a stablecoin backed by gold offers the best of all worlds. It is a proven hedge from the variables associated with fiat currencies and the stock market, as well as being useable and convenient.
Where are Stablecoins Headed?
With the evolution of crypto markets and stablecoins, millions of new cryptocurrency enthusiasts, investors as well as traders have a virtual on and off-ramp at their disposal.