Cryptocurrencies, highly speculative as they are, have found an ally in stablecoins. With the great crypto crash casting doubt on the promise of a bright digital currency future, people tend to turn to safer ground rather than risk it all for higher liquidity. This could well be one of the main reasons why there is a blatant increase in interest in stablecoin investment.
What stablecoins are
Unlike the bitcoin which is a stand-alone cryptocurrency, a stablecoin is collateralized which means it is pegged to an underlying asset. Assets could be in the form of fiat money (US Dollar, Euro, etc.), gold and other precious materials, or even other cryptocurrencies.
The best thing about stablecoins
A stablecoin is essentially cryptocurrency and certainly behaves like one. It runs on unique cryptography which makes duplication close to impossible. Transactions involving stablecoins are done in a decentralized blockchain network. The only difference (which is the best thing about stablecoins) is that since it is pegged to an underlying asset, it is not subject to the volatility stand-alone cryptocurrencies are known for.
There are different kinds of stablecoins. These include the following:
- Fiat-collateralized stablecoins. These stablecoins have the most regulatory conditions since the cryptocurrency is pegged to actual state-minted currency such as the US dollar. This type of stablecoins is subjected to central controls which straddle the line between honest-to-goodness crypto or tokenized investment. Examples of fiat-collateralized stablecoins include Circle-USDC; Gemini Dollar; AAA Reserve; Paxos Standard; Globcoin; Stasis; Stronghold; Stably; TrustToken-TrueUSD; Tether-USDT; and X8X.
- Crypto-collateralized stablecoins. Investors who do not like too many regulations or are wary about central authority can opt for this type of stablecoins. These coins are pegged to fellow cryptocurrencies. The only limitation here is that investors are exposing them to the market’s volatility since the underlying asset’s value is fairly unpredictable. However, assurances are given to the investor through a security pledge. This states that the token issued might not have a 1:1 ratio towards the collateralized crypto. This pledge will be upheld even if the stablecoin has an existing 1:1 ratio to the underlying asset. Examples of crypto-collateralized stablecoins are Havven-NUSD; Bitshares BitUSD; and MakerDAO-DAI.
- Algorithmic supply stablecoins. Here, an algorithm via the Seigniorage Shares system directs the supply volume in order to maintain the value of the stablecoins. If the value is low, stablecoins are sold through smart contracts. If the value is high, more tokens will be supplied to the market. Examples of algorithmic supply stablecoins are Kowala; Ampleforth; and Anchor.
- Commodity-collateralized or metal-backed stablecoins. As the name suggests, these stablecoins are pegged to precious metals such as gold. Notable stablecoins of this nature are Digix Global, Tiberius Coin, SwissRealCoin, and HelloGold.
- Hybrid and Alternative. There are some stablecoins that could share characteristics of different kinds of stablecoins. Some are pegged to both fiat and cryptocurrencies. Some are completely decentralized but still run on an algorithmic supply and demand. Examples of this type of stablecoins are Celo, Terra Money, Phi, Saga, and Aurora-Boreal.
- Cross-border payments and remittances are made easier and cheaper with stablecoins since they run on a blockchain network sans central controls.
- Compared to stand-alone cryptocurrencies, stablecoins particularly the fiat-collateralized type are legally backed and secure.
- Investors can rest assured that they are not exposed to the volatile nature of the cryptocurrency market.
- Stablecoins are best for remittances since migrant workers can just send money via digital wallets to their families back home. Family members can then exchange it for fiat money all at real time.
- Just in case the fiat currency is losing steam, investors can immediately switch stablecoins to a better performing currency mostly the US dollar or commodity-collateralized stablecoins.
- Stablecoins operate on trust. This means fraudulent companies can take advantage of unsuspecting investors. Investors have to make sure stablecoin sources conduct periodic third-party audits to make sure investments are safe, secure, and transparent.
- Since fiat-collateralized stablecoins operate with some degree of central authority, crypto enthusiasts might feel constrained with all the regulatory conditions in place.
- Stablecoins are known to be less liquid as compared to their stand-alone counterparts. Take for example commodity-collateralized stablecoins. One cannot just withdraw precious metals like you would fiat money. It will take a longer time to gain access to the actual underlying asset stablecoins are pegged on.
- Cryptocurrency-collateralized stablecoins are as vulnerable to volatile fluctuations as the cryptocurrencies these are pegged on.
- Finally, non-collateralized and crypto stablecoins might be too technical to understand for a regular investor.
Purchase, Trade, Redeem
When investors want to purchase or trade stablecoins, they have to register in legitimate stablecoin exchanges. Once done, user-friendly instructions are given to successfully complete a purchase or trade. For redemption, one can either have a digital wallet or bank account to which redeemed funds are sent to. Once stablecoins have been sent, enter desired redemption amount and withdraw it from the bank or from corresponding payment centers.
With less volatility and the fact that these are legally backed, stablecoins might just be the best choice, especially for first-time cryptocurrency investors. At the end of the day, however, it is still up to the investor if stablecoins are worth the time despite their limitations.