The Firm and Steady Hand of Stablecoins: All You Need to Know

If you’ve been following the trend of digital currencies, then you should’ve known by now that cryptocurrencies are relatively known for their high volatility. It means that the market values of digital currencies, in general, can rise significantly and has a high possibility of it plummeting abruptly. With that in mind, it can be quite difficult for investors to eliminate or conclude on a particular coin to invest in, hence the introduction to stablecoins to solve this concern. 

Basically, stablecoins are cryptocurrencies that are backed or supported by particular assets such as precious metals, fiat currencies, or even other cryptocurrencies. These particular assets make the coins less susceptible to fluctuations and try to keep their market values as stable as they can be, and you can only get crypto on cryptocurrency exchange platforms or websites like Bitcoin Loophole. There are also certain stablecoins that utilises a computer algorithm to keep their value relatively stable. In this article, we’ll go through what stablecoins are and the major types of stablecoins in the market today.

The Stability of Stablecoins

Compared to traditional digital currencies or coins, stablecoins are relatively similar to it as their initial purpose was to limit the volatility that crypto investors typically experience with digital currencies. Basically, stablecoins are somewhat pegged into another digital asset with, of course, having a value that’s stable enough to be used for purchasing. Furthermore, the general consumers who are looking to buy and sell goods and services that are typically no-currency have the possibility of experiencing massive changes in their place, regardless of during or after the transaction.

Back in 2017, the existence of stablecoins slowly gained the attention and praise of many people, especially the likes of investors, when Bitcoin’s market value surged to 20,000 dollars per coin and fell by 50% shortly after. With that scenario in mind, investors are now looking for a different digital currency asset that is less likely to be volatile compared to traditional digital currencies, of course, all for its crypto-based store of value.

The Pros and Cons of Stablecoins

There are many reasons why stablecoins are great. One of which is the fact that stablecoins can be used internationally without having exchange fees involved, not to mention that transactions with stablecoins are relatively much faster than of the top cryptocurrencies in the market like Ethereum and Bitcoin. Also, stablecoin-related transactions are recorded in a public ledger that anyone can view while keeping the identity of its users completely anonymous.

Furthermore, as people buy stablecoins to set up some type of hedge against the raging inflation of cryptocurrencies, you have to keep in mind that stablecoins are meant to be stable, meaning that it doesn’t grow as quickly compared to traditional coins. But the biggest potential risk when it comes to stablecoins is whether you trust the company that maintains the crypto or not, and if the company is not transparent about the location of the reserves, the stablecoin that is pegged into can potentially be worth much less than it’s supposed to.

The Different Kind of Stablecoins

As when there are already thousands of different digital currencies in the market today, there are also countless other stablecoins that have existed in the space. So when choosing the best stablecoin to invest in, there can be a lot of factors to consider, as well as choosing between variations of stablecoins. But as with any other type of investment, you should still do your own research about the matter so that you can have educated decisions towards your investment. Because if you do, you will be able to minimise or mitigate the risks or the possibility of a great loss. The major types of stablecoins are as follows:

1. Stablecoins That Are Backed with Commodity

First up on the list are stablecoins that are backed with a different commodity in the market. Basically, these types of stablecoins are backed with a particular commodity that is being stabilised by hard assets such as gold, real estate, and all the likes. Additionally, there are instances that these particular stablecoins will use diversified baskets of precious metals as one of the most commonly used assets to back a stablecoin is a precious metal like gold.

1. Fiat-Backed Stablecoins

Up next are stablecoins that are backed with fiat currencies, and those are the kind that keeps real currencies as collateral. Additionally, there are also other forms of fiat currencies which include precious metals such as gold, silver, or platinum, as well as other types of commodities like oil or corn. At length, most of the stablecoins that are backed with fiat currencies are also backed with dollar reserves that are administered through an independent custodian to ensure its overall compliance.

1. Stablecoins That Are Backed with Another Crypto

Crypto-backed stablecoins are basically digital currencies that are backed with a different kind of cryptocurrency that can maintain an over collateralised position, which is typically utilised to counter the high volatility of traditional crypto back to stablecoins. In other words, stablecoins that are backed with crypto are circulating the crypto market with a much lower supply compared to fiat-backed stablecoins. Additionally, stablecoins backed with a crypto asset would make you think if it is worth trading or not, so to get help with trading, you may visit Bitcoin Loophole for full profitability.

1. Stablecoins with Seigniorage Style

Seigniorage-styled stablecoins are basically cryptocurrencies that are backed and governed by a certain process or algorithm instead of being backed by a different crypto asset or fiat currency. The general idea of this particular stablecoin comes from the whitepaper noted by Robert Sams, a cryptographer, in which he tries to push forward the thought of a Federal Reserve Coin or Fedcoin. Additionally, decentralised platforms that deploy smart contracts to the market can also be a substitute as an autonomous backer for stablecoins.

Should You Invest?

Compared to traditional digital currencies, stablecoins are considered to be relatively safer compared to them. But despite the fact that stablecoins are safer, the asset is still relatively new, especially when concerning their technology. So if you’re planning on investing in stablecoins, keep in mind that doing so is a relatively risky venture as the asset is meant to stay stable with fewer surges and downfalls in the market. Regardless, most crypto investors would agree that adding stablecoin or two to your investment portfolio can be beneficial as it’s always good to add more diversification to it in protecting yourself from massive losses.