What is a Stablecoin? You might have heard this term severally and you are probably wondering what it is all about. Well, a stablecoin is a cryptocurrency that has a fixed price. This simply means that their price does not change even though there is a crash in the crypto market.
Stablecoins attach their price to the value of stable assets. Hence, when you buy this cryptocurrency, you do not have to worry about the risk of volatility. Read further for a better understanding.
What is a Stablecoin
At times, a crash occurs in the crypto market. When this happens, the market value of a cryptocurrency drops. Depending on the length of the market crash, the prices of crypto remain low throughout that period.
In most situations, it makes investors run at loss. Regular cryptocurrencies like Bitcoin, Ethereum, Litecoin, and many others are constantly subject to a change in their market value.
However, Stablecoins are a different type of cryptocurrency. Even though there is a collapse in the crypto market, their price remains the same. These coins were designed to reduce the volatility in the market value of cryptocurrencies. Thus, making them safer for people to invest in without worries of cash loss even in a crypto collapse.
How Do Stablecoins Work?
Although Stablecoins are cryptocurrencies, they do not operate in the same way as other digital crypto assets. As earlier stated, they aim to provide an alternative to constant fluctuation in the price of cryptocurrencies.
They operate by attaching their market price to the value of some other assets. These assets have stable value. They could be traditional currencies such as US dollars or currency baskets.
In addition, they could peg their value to the price of valuable commodities such as gold or even to other cryptocurrencies that survive market crashes. Furthermore, Stablecoins maintain their value by taking certain measures to control their circulation. Hence, stablecoins are more secure when it comes to their value than other digital cryptocurrencies.
Types of Stablecoins
Stablecoins have the backing of commodities. The types of stablecoins vary with the asset they peg their price on. The types of stablecoins are stated below
Most stablecoins are pegged to traditional collateral. They use collateral such as the US dollar and precious metals like gold and silver as their backing. These stablecoins remain in reserve with financial institutions or independent custodians.
These stablecoins are backed up by other cryptocurrencies as collateral. These stablecoins are also held in reserve. However, because the reserve cryptocurrency is still prone to volatility. Also, in most cases, the value of the cryptocurrency held in reserve is more than the value of the stablecoin issued.
Algorithm stablecoins work toward the stability in the price of this crypto by using an algorithm. The algorithm could be a computer program or other measures running a formula—this algorithm work to track and manage the circulation of stablecoins in the market.
What are Stablecoins Used for?
Stablecoins are used as a medium of exchange on the crypto market. Investors can exchange other cryptocurrencies for stablecoins on the crypto market. Additionally, they are used as portfolios to venture into asset investment and earn interest.
Can Stablecoins Make Money for You?
In recent times, stablecoins are becoming a very profitable digital asset investment. Although they are not as recognized as other cryptocurrencies like Bitcoin and Ethereum, they could still make a lot of money for you.
Stablecoins make money through investments in corporate bonds, precious metals, and other digital assets. Also, similar to traditional asset investment assets, stablecoins make money from lending to other parties through banks. Stablecoins are a source of passive income.
What is the Benefit of a Stable Coin?
Stablecoins have fixed value. Thus, even in the face of a collapse in the crypto market, their price is not always affected. Additionally, stablecoins are a good investment choice because of the way they generate cash flow for their investors even in a market crash.
What are the Disadvantages of Stable Coin?
Although the advantages of stablecoins are numerous, there are certain drawbacks when it comes to this currency. As stablecoins have the backing of assets, if the value of the assets drops, or in case of inflation, it will also affect the price of the coin. Furthermore, stablecoins are decentralized currencies. Hence, a fraudster could hack into your account and access your funds.
How Do You Buy Stablecoins?
It typically follows the same process as purchasing a regular cryptocurrency. Firstly, you’ll need to create an account or a digital wallet with a crypto exchange. When you create an account or a wallet, you can then purchase the stablecoins into it directly. However, crypto platforms that allow you to trade stablecoins are not available in all locations.
5 Best Stable Coins
Having known what stable coins are all about, you need to know the best stablecoins you can invest in. With the increasing number of stablecoins in the market, it might be difficult for you to know the good ones invest in. Below are some of the best stablecoins in the crypto market
Tether is one of the earliest stablecoins in the market. It is also the most recognized and most used. This stablecoin is backed up by traditional currencies, cash equivalents, and precious metals as collateral. Furthermore, Tether is highly secure and is a good choice if you want a high-volume stablecoin.
USD Coin (USDC)
USD coin is a digital cryptocurrency created by Circle. It is a stablecoin pegged to the US dollar. The stability of this coin provided by the assets backing it makes it a good choice if you are looking for safe returns.
Binance USD (BUSD)
Binance USD is a stable created by both Binanmce company and Paxos. This coin is backed by US dollars. Furthermore, when you invest in these coins, the funds are stored in Paxos bank accounts. Due to its backing, it is considered one of the stablecoins suitable for you to invest in. In addition to this, it has a high-income potential for its investors.
True USD (TUSD)
This stablecoin is backed by US dollars. Also, it is one stablecoin that is in the market that can be easily liquified. True USD offers a high-interest rate to its investors. It is also one stablecoin you should consider if you are looking for one that emphasizes regulation.
Decentralized USD (USDD)
USDD is an algorithm stablecoin. However, the coin has a 1:1 backing by US dollars. This stablecoin is fast becoming one of the most popular in the market for investors. Furthermore, it yields fair interest returns for investors and could be a good source of passive income.
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