Even though it’s a relatively nascent industry, there are already more than 10,000 cryptocurrencies in the market. And this number continues to grow every month. One of the most important cryptocurrencies you will come across is stablecoins. Why you may ask? This is because Stablecoins are universal and non-volatile. In fact, they can be used to buy every other crypto in the market. This makes it unique and a popular option for many traders. Find out more about the different types of coins and how they are used.
What are Stablecoins?
In order to understand Stablecoins, we first need to know more about payment coins. Payment coins are forms of digital currency that you can use to pay for goods and services online. They are beneficial because they allow the coin value to be transferred between different parties. Payment coins are even accepted in many real-world situations such as tickets, food and car payments. As one of the more popular payment coins, stablecoins have been designed to match the price of a real-world currency. They are often “pegged” to the US dollar, and their value is not as volatile as other cryptocurrencies, making them a safe bet.
What are the benefits of stablecoins?
There is a strong market appetite for cryptocurrencies because of their high volatility, even with all of its risk. It has become a highly popular trading tool, especially as prices move more quickly than on the traditional stock exchange. However, too much risk can also deter potential users, which is one of the reasons why stablecoins are so popular.
No matter what type of stablecoin you have, you can rest assured you have an efficient method for making payments. While their prices are also volatile, they provide a certain level of stability and security for the user, which makes them a better source for making payments.
This also means these bitcoins are easier to exchange on a number of exchanges, as they have proven to be a safe space while still providing easy access.
Because stablecoins are usually pegged to currencies like the US dollar, they provide a great option for users to store cryptocurrency, especially in areas of economic upheaval and hyperinflation. There are several types, all of which are used regularly in decentralised economic systems.
As we’ve already discussed, some types are tied to a real-world asset like the US dollar, or potentially even precious metals like gold or silver. A very common fiat-backed stablecoin in USD Tether, otherwise known as USDT, is backed by the US dollar. It’s known as Tether as that is the name of the Hong Kong-based company which issues USDTs. In order to ensure stability, the company keeps a reserve of US dollars equivalent to the amount of USDT they provide. This means that they ensure that they have enough US dollars to back every USDT their users own.
Stablecoins can also be attached to other cryptocurrencies. When this happens, the other cryptocurrency becomes the collateral, with coins stored away to ensure they can be pegged. While these types of coins remain full entrenched in crypto trading, it does mean that they pegged to another cryptocurrency won’t have a ratio of 1:1. This is because the price may be even more volatile, so having a higher ratio balances out the volatile price movements. A well-known example of these types of stablecoins is DAI. It does represent a 1:1 ratio with the US dollar, but this is because users instead use as collateral their Ether, another well-known form of crypto payment on the Ethereum network.
Algorithmic stablecoins are a slightly different type as they do not depend on fiat or crypto as collateral. This type uses a smart contract set-up to help adjust its market cap in line with price fluctuations. This means that the total supply decreases when the price falls, which then in turn lifts the price back up. On the other hand, if the price rises too much, it increases the number of tokens in circulation to help the price decrease. This is a very common type used in DeFi. A popular algorithmic stablecoin is known as Ampleforth or APL.
The key to the popularity of stablecoins in crypto trading lies in its name – stability. Because they are not as volatile as other coins, they provide a certain level of reassurance to users. By pegging the value to a fiat currency, like the US dollar, or even to gold, they can maintain better price stability. However, this doesn’t mean that there isn’t any volatility, as prices still fluctuate on things such as market capitalisation, and the number of traders or tokens available in the market. Stablecoins are commonly used in DeFi and provide a lot of stability and security while still providing easy market access.
Hopefully, this article provides more clarity around the various types of stablecoins available in the market and how you can benefit.