What is a stable coin? How do stablecoins work? What are the advantages of stablecoins? What are some uses of stablecoins? What can you do with a stable coin? We’ve got the answers to all your questions right here!
What are stablecoins?
A stable coin is any cryptocurrency that keeps a consistent value against an outside asset (usually fiat money).
This can be done by pegging it to an external asset like gold or oil and then having people buy and sell units of it on exchanges.
The best-known example of a successful stable coin so far has been Tether. But even Tether—which holds assets in United States dollars and uses fiat bank accounts as its underlying source of funds—hasn’t yet proved that its reserves are large enough for it to remain pegged for long periods at a time.
There are other reasons why someone might want access to cryptocurrency but doesn’t necessarily want crypto volatility.
Why are they important?
Stablecoins are an important part of cryptocurrency’s growth as they fill in missing spots on exchanges and in portfolios.
We wanted to give investors and readers an overview of what they are and how they fit into cryptocurrency. Everyone has heard of Bitcoin by now.
But did you know there are over 2,000 other cryptocurrencies out there? While that sounds like great news for investors looking for more options with higher returns than their fiat currency can provide, it also presents problems in portfolio management.
What can you do with stablecoins?
The main purpose of a stablecoin is to stabilize cryptocurrency markets. The most common way they achieve stability comes from their economic design.
They usually involve systems that automatically control supply and demand by pegging their value—they’re stable because they rarely fluctuate in price (or at least not very much).
What is the best stablecoin?
The Binance USD is one of the most popular stablecoins on the crypto market. Binance generates these stablecoins.
Binance crypto is basically pegged to fiat cash, specifically the US dollar. It is one of the most commonly used stablecoins.
How do stablecoins work?
A good way to understand how cryptocurrencies work is by looking at blockchain —the distributed ledger technology underpinning crypto.
In blockchain networks, digital information (in any form) can be sent from one entity to another without any chance of being copied or altered.
This allows people to exchange sensitive data—such as digital currency—without needing an intermediary like a bank or clearinghouse involved in each transaction.
What makes it so secure? If someone sends an amount of money on the network and it isn’t where they say it should be, everyone else can see that something’s wrong right away—and can help fix things.
Fiat-backed stablecoins
The most common type of stablecoin is fiat-backed. These coins are backed by a central entity (usually a bank) that issues digital cash equal in value to their reserves.
USD Coin (USDC), TrueUSD (TUSD), and Gemini Dollar (GUSD) are examples of fiat-backed coins. How these coins can be used depends on where they operate:
Gemini Dollars can only be used for trading on Gemini; Tethers can be used for exchanges that use Tether’s liquidity pool or converted into other cryptocurrencies like BTC; USDC is live on multiple exchanges as well as popular payment platforms including Coinbase and Binance.
Precious metal-backed stablecoins
In an attempt to bolster investor confidence in cryptocurrencies, several companies have announced plans for what are known as precious metal-backed stablecoins.
Such coins are designed to maintain a constant value by being linked directly to their underlying asset—either gold or silver.
This helps ensure they won’t be affected by high volatility in fiat currencies and so should provide investors with greater stability than other cryptocurrency investments.
Several companies have announced plans for precious metal-backed coins over recent months; some of them include: Digix Gold Token (DGX), Apex Token Fund (APEX), Havven (HAV), and more.
Crypto-backed stablecoins
Stablecoins aren’t without their drawbacks. While any crypto asset that can be easily bought and sold at a 1:1 ratio with fiat currency will appeal to investors and exchanges, they’re not ideal for actual use in commerce because of high volatility.
If your business accepts $1 in digital coins as payment today, there’s no guarantee that it will still be worth $1 when you go to sell it tomorrow.
This makes stablecoins less appealing than cryptocurrencies like bitcoin or ether (the native token of Ethereum) that might not be as the liquid but tend to retain their value over time.
Where can I buy stablecoins?
The biggest players in the market right now are Tether (USDT) and TrueUSD (TUSD). You can purchase them on Binance for USD or BTC.
Alternatively, many exchanges are paired with fiat deposits so that you can fund your account with USD (like Bitfinex) or EURO (like Bittrex).
Some other exchanges like KuCoin have their own stablecoins – KCS/KuCoin Shares and USDC/U.S.
What are the drawbacks in stablecoins
The obvious problem with any digital currency that isn’t tied to an asset of some kind is price volatility.
What makes traditional cryptocurrencies like bitcoin and ether valuable are their ties to fiat currencies: paper or digital money whose value has been backed by governments for centuries.
Without that credibility, it’s hard for most people—and even many cryptocurrency enthusiasts—to make sense of why a token with no inherent value would be worth anything at all.
