What Are Stablecoins & What Is Their Point?
It is a well-known fact that cryptocurrencies are some of the most volatile assets on the market. Take a look at the price charts of the most famous cryptos, and you will see how their value can change by dozens of percent in a matter of days. Volatility makes crypto a good asset for those looking to profit from price fluctuations. At the same time, due to the same trait, most cryptos could be better suited for buying and selling items daily.
However, a whole group of cryptocurrencies radically differs from their volatile counterparts. They are known as stablecoins - cryptos whose value is fixed at a certain level, which allows people to use them as a means of payment and a tool for storing their savings.
What are stablecoins, how are they used, and what popular stablecoins are there? Let’s dive into these questions.
What are stablecoins?
Stablecoins are cryptocurrencies whose price is tied to other assets with a fixed real value, usually popular fiat currencies such as US dollars and euros. In most cases, the prices of one stablecoin and one unit of fiat currency to which it is pegged correlate as 1:1.
Stablecoins are designed to maintain their value at a fixed level, regardless of what processes take place in the crypto market. This is possible because, unlike other cryptocurrencies that have no intrinsic value, stablecoins are backed by real reserves consisting of other assets. These reserves can include fiat, gold, or even other cryptocurrencies. Regardless of what the reserves include, their value should fully cover the total price of all the stablecoins they back.
Although the price of popular stablecoins is not 100% immovable and can fluctuate within a few cents during the day, such shifts cannot even be compared to the extreme volatility of other cryptocurrencies. Besides, companies issuing stablecoins always react to any significant price changes and take measures to restore the balance as quickly as possible.
What are stablecoins used for?
Given the specifics of stablecoins, the peculiarities of their use are also significantly different from those inherent in other cryptos. Here are some of the functions that this type of cryptocurrency can perform:
- Payment for goods and services. Since stablecoins have a fixed price, you can use them to pay on par with fiat in those marketplaces that allow it. Other cryptocurrencies perform the payment function much worse because their value can change rapidly. An item priced at 1 BTC may, in fact, cost $24,000, $22,000, or $26,000, depending on when it is bought. In turn, if the price of the product is expressed in stablecoins, it will remain fixed, which is much more convenient for both buyers and sellers.
- An alternative to fiat on exchanges.
Suppose you want to buy cryptocurrency on a crypto exchange. In that case, you must first deposit fiat funds into your account and store them there for future purchases. However, this is not always convenient. Stablecoins are a suitable alternative, as they are essentially the crypto equivalent of the most popular fiat currencies. Therefore, crypto enthusiasts are increasingly abandoning fiat by purchasing crypto for stablecoins and vice versa, enjoying lower fees and faster transactions.
- Safeguarding your crypto during enhanced volatility. If you have conventional, volatile crypto in your collection, you know that sometimes the risk of suffering significant losses from a drop in its rate is high. In such situations, some decide to wait out the turbulence in the hope that the value of their coins will rise again. Others prefer to convert their cryptos into stablecoins and preserve their value. In such a way, they try to increase their chances of mitigating risks and minimizing losses from market turbulence.
- Storing your savings. It is not necessary to keep all your savings in cash and bank accounts. With stablecoins, you can convert some of your funds into crypto and store it in your digital wallet. This way, you will not only diversify your savings but also transfer some of them into a highly convenient format because in order to dispose of your stablecoins, you do not have to go carry out various bureaucratic manipulations that you may encounter if you store all your money in the bank.
These are just some of the most common uses of stablecoins. Even this brief list is enough to understand that this type of crypto can performing numerous functions that other coins are unlikely to cope with.
What are the most popular stablecoins?
Today, there are about two hundred stablecoins in the world. However, not all of them are equally widespread. Among all coins of this type, two deserve special attention as the most well-known and time-tested:
Tether is one of the oldest stablecoins in the market and, at the same time, the largest stablecoin by market capitalization. Moreover, when it comes to market cap, USDT is the third largest cryptocurrency in the world, being rated right after Bitcoin and Ethereum! USDT is pegged to the US Dollar. According to numerous statements by Tether, each coin is 100% backed by the company’s reserves, which include a complex combination of fiat currencies and other assets. Since Tether is the most popular stablecoin, you won't have a problem finding it on most crypto exchanges, with the price fixed at $1.
USD Coin (USDC)
Like USDT, USDC is a stablecoin with a value pegged to the US dollar on a 1:1 basis. It is the second-largest stablecoin and the fourth cryptocurrency in the world by market capitalization. Launched in partnership between Circle and Coinbase, USDC operates on the Ethereum blockchain. One of the hallmarks of this stablecoin, which experts often pay attention to, is its transparency. USDC's parent companies are completely open about the reserves that support its price. These reserves are the subject of regular audits confirming that each USD Coin is backed by real assets nd therefore endowed with intrinsic value.
If you are interested in crypto, stablecoins are definitely a topic that might interest you. Backed by reserves that gave them intrinsic value and pegged to fiat currencies, these coins combine the stability of fiat with the convenience of crypto.
Although due to their low volatility, they are not as effective a tool for making profits as other cryptocurrencies, stablecoins perform numerous other functions, serving as a means of payment, a safeguard against crypto volatility, and a tool for storing one’s savings.
Among the numerous stablecoins that exist in the world, USDT and USDC have the highest popularity and liquidity. In just a few clicks, you can purchase them and start your acquaintance with stablecoins right now!
Disclaimer: Our content does not constitute financial advice. It is only intended for informational and educational purposes.