Possibly the greatest downside of cryptocurrency is its volatility. Even though it offers a chance for speculation and, therefore, great earning opportunities, it definitely has its downsides. One of them is using crypto for day-to-day payments, as it may result in significant losses. For this reason, such price unpredictability had to be managed and reduced somehow.
In late 2014, the longed-for antidote to crypto volatility was introduced to the market. In years to come, a number of similar cryptocurrencies have exploded on the market. They were named stablecoins, after stability, their primary feature.
Source: Hashmart
The Basics of Stablecoins
A stablecoin is a digital asset that is pegged to another asset with a stable price. It can be a fiat currency (such as USD, EUR, GBP), other assets (such as gold or oil), or even other cryptocurrencies.
Given the fact that stablecoins have been created to bypass the high volatility typical for the currencies in the crypto market, they track the value of other assets it is pegged to. Due to their peg, stablecoins are immune to price volatility, so they enable traders and investors to trade, invest, and make transfers at a pretty stable price on P2P blockchain networks.
A stablecoin is easy to buy, and you can find a diverse array of them on our platform.
Types of Stablecoins
The following list shows the top stablecoins you can find on the CEX.IO platform. Note that they aren’t listed in any particular order.
Tether (USDT)
Tether was among the first stablecoins to be introduced to the crypto market. The eponymous company from Hong Kong introduced the coin back in 2014.
Pegged 1:1 to the USD, Tether stands for one of the most convenient and popular ways to trade and invest in crypto markets. As of April 8, 2022, Tether (USD) is ranked third on CoinMarketCap.
Binance Stablecoin (BUSD)
BUSD is yet another 1:1 USD-pinned stablecoin introduced by Binance and Paxos. Its price is always $1, and the coin is regulated by the NY State Department of Financial Services.
BUSD is listed 13th on CoinMarketCap as of April 8, 2022.
Gemini Stablecoin (GUSD)
GUSD is launched by Gemini, a crypto exchange that the Winklevoss twins have founded. The stablecoin should offer its tokens on the Ethereum network that features the ERC-20 standard.
On April 8, 2022, GUSD was ranked 256th on CoinMarketCap.
Coinbase Stablecoin (USDC)
Listed fifth on CoinMarketCap as of April 8, 2022, and priced at $1, the Coinbase stablecoin was issued by Coinbase crypto exchange in partnership with payments company Circle.
It was introduced back in 2018 in order to offer a sanctuary to traders and investors from high volatility. However, it’s not meant for them only. USDC’s stable price also allows businesses to accept payments in crypto, without fear that they will devalue moments afterward.
PAX Gold (PAXG)
Pax Gold was launched in September 2019 by makers of Paxos Standard. It is a gold-pegged cryptocurrency whose main goal is to make gold more tradable and allow traders to begin investing in gold more easily.
Other commodity-based stablecoins offered on our platform are AurusGOLD (AWG) and AurusSILVER (AWS)
Source: Statista
The Use of Stablecoins
Even though stablecoins have been created as a countermeasure for the price volatility of cryptocurrencies, they’re not solely used for trading or investing. Token holders can also use them in a range of different real-world situations, which may even help them save their money.
Presently, there are some financial institutions and exchanges that charge exuberant transaction fees when converting one fiat currency into another or when making cross-border transfers. Additionally, those transfers and settlements may last even several days.
With stablecoins, you can reduce both the time and costs — fees are way lower and transfers are made in minutes.
Source: FinTech Futures
Are we in for new tokens?
Due to the stability and wide use of stablecoins, some of the largest economies in the world are considering launching new tokens referred to as CBDCs (central bank digital currencies).
Some financial institutions, such as the Bank of England and the People’s Bank of China, regard blockchain technology and crypto as increasingly fundamental segments of their monetary policy.
A number of organizations expect that blockchain transactions will bring much-needed and desperately wanted modernization, particularly nowadays when smartphone wallets are getting more popular compared to traditional bank accounts.
Advantages and Disadvantages of Stablecoins
So far, we have learned that stablecoins are extremely versatile and mighty tools for crypto users, traders, and investors. Their primary upsides include:
- They can be used for daily payments — unlike traditional cryptocurrencies notorious for high volatility, stablecoins are pegged to fiat currencies. This makes them perfect and trustworthy for everyday use in various businesses.
- They are blockchain-based — stablecoins use blockchain technology for transactions. You can send or receive a coin from anywhere in the world almost instantaneously. Besides, stablecoins are also pretty secure, as it’s technically impossible to do false or double-spending transactions.
- They can be used for hedging portfolios — traders and investors are aware of the significance of a good portfolio. Stablecoins help to minimize overall risk. This way, your portfolio is protected against price fluctuations. Additionally, you will have enough funds handy in case a good trading opportunity pops up. Plus, you’ll be able to sell cryptocurrencies for stablecoins when their price increases, then buy them again at a lower price. Finally, stablecoins let you enter and exit positions effortlessly, without taking money off-chain.
In spite of their potential to support adopting crypto globally, stablecoins still have their drawbacks:
- They aren’t guaranteed to keep their peg — even though there are larger coins that maintain a stable track record, there have been a number of those which have failed. In case a coin has continuous problems keeping its peg, it might lose its value drastically.
- Low transparency — USDT and USDC still don’t have full public audits, while other large coins offer only regular attestation performed by private accountants on behalf of token issuers.
- Fiat-collateralized coins can be more centralized — since a central entity monitors collateral, it can be subject to external financial regulation. This further offers them considerable control over the stablecoin.
Are Stablecoins Regulated?
Because of stablecoins’ original mix of fiat and crypto, regulators worldwide are becoming more and more interested. Thanks to their stable price, they can be used in the real world, not only on the crypto market. Furthermore, you can transfer them globally instantly and without high fees.
On account of this, it is argued that stablecoins may become a fiat competitor, even though they can’t be monitored by a central bank. There are countries which have started experimenting with issuing their own stablecoins as a response to this.
However, a stablecoin is still regarded as a type of crypto and will most probably be regarded as such by your local jurisdiction.
The Bottom Line
Nowadays, stablecoins are an integral part of any crypto exchange offer. Even though they’re excellent for novices who are getting into the world of crypto, veteran traders who want to capitalize on the market opportunities can also benefit from them. They’re great for entering and exiting positions without cashing out fiat currencies.
However, stablecoins aren’t tied to trading and investing only. They can be quite handy for daily payments, quick transfers across the globe, and even earning passive income.
Yet, stablecoins don’t come without risks, so you shouldn’t underestimate or neglect them. They might be quite versatile, but they’re still crypto and bear similar risks. You can minimize or outweigh them by diversifying your portfolio, but make sure that you’ve done your research before you start investing or trading.
Disclaimer: For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.
