The Ultimate Guide to Crypto Stablecoins

With the fast-growing cryptocurrency industry still in its early stages, price volatility remains a major concern for all market participants. Another challenge is trying to settle your digital assets in cash to make payments. Since crypto markets are global and the traditional banking system is trying to catch up with the speed of innovation, it is a bit tricky to cash in your crypto.

You can’t always depend on a cryptocurrency to have a constant price, nor can you expect it to be easy to cash them in for payments or send to your bank. Stablecoins represent a unique crypto asset class that helps solve volatility and lack of usability issues, raising the comfort level for both new crypto enthusiasts and seasoned investors. Due to their reliability and versatility, stablecoins are often considered the gateway to the crypto markets.

What is a stable coin?

A stablecoin is a type of cryptocurrency pegged to a “stable” asset in a 1:1 ratio. For example, the Tether and USDC stablecoins are pegged to the US dollar, which means that the market price of a Tether coin and a USDC coin will always be very close to, if not exactly, $1.00. Other types of stable assets such as commodities and precious metals can be used to back a stablecoin, with Gold coin being an excellent example of a stablecoin backed by physical gold.

Each stablecoin has a reserve of whatever assets back it. This is how its price remains generally non-volatile and more suitable for use in payments. On many exchanges, you can simply cash out your stablecoins 1:1 for dollars and have them transferred to your bank instantly for little, and in some cases, zero cost.

The benefits of using stablecoins

Because they are so easily transferred between crypto and fiat markets, stablecoins enjoy low volatility and a very high level of liquidity. One of the first crypto stablecoins, USDT (Tether), has been so reliable and stable that in 2021 over 75% of Bitcoin trading was done in USDT. This high level of liquidity and utility provides even more stability for crypto investors in an otherwise highly volatile market.

But that’s not all that stablecoins can do. These versatile digital assets come packed with a variety of additional features and benefits. Here are some:

  • Stablecoins can be a safe haven asset. For this, you’ll want to consider a stablecoin backed by something other than USD, especially if you’re looking to protect your wealth during a market downturn. Historically, commodities and precious metals like gold have been sought after as “safe haven” assets in times of high volatility. In the past, investors looked to physical gold as the safe haven of choice. In modern times, physical gold still has its place, but a gold-backed stablecoin provides both the convenience of owning gold and the added benefits of increased usability, liquidity, and stability.
  • Borderless payments are possible with stablecoins as they connect to global crypto markets in real time. remittanceswhich are payments sent home by a worker living in another country, are cheaper, faster and more convenient when using stablecoins.
  • One challenge for global companies is how to pay employees from various regions. As remote work becomes more common, employers can access a global pool of employees, but how do they efficiently pay their staff when employees reside in a large number of countries? Using stablecoins to pay for them makes sense in our digital economy.
  • Gaining access to the wide world of crypto markets is another huge advantage for stablecoins. If you own stablecoins, you can easily transfer them to other digital assets if you decide to get your feet wet in DeFi apps, participate in an initial exchange offering (IEO), or join a Twitter meme competition for crypto prizes.

Now that you know what stablecoins can do, let’s take a look at some of the most popular options today.

Fiat-backed stablecoins

Backed by a fiat stablecoin, crypto exchanges and platforms essentially have a two-way bridge for their clients between the crypto markets and the traditional monetary system. This is because, at the moment, the US dollar is the world’s reserve currency and almost all countries base their currency on it.

Most exchanges, including Coinbase (USDC), Gemini (GUSD), and Binance (BUSD), now have their own stablecoin, often in addition to listing other popular stablecoins. They usually have a 1:1 fiat cash pool, which allows them to allow their users to easily switch back and forth without any issues. Withdrawing money from USDC or GUSD costs almost nothing and due to its stability, bank transfers are also free or almost free.

Commodity-backed stablecoins

Stablecoins can be backed by assets other than fiat money or even a basket of assets. But commodity-backed stablecoins offer an alternative that helps investors diversify their holdings. Many different products can be used to back a stablecoin, but gold is the most popular as it has been a safe haven on its own for hundreds of years.

Now with digital capabilities, a precious metal-backed stablecoin that uses gold as its parity offers the best of both worlds. It provides well-proven coverage of traditional fiat currencies and stock markets, as well as a high level of usability and convenience.

Commodity-backed stablecoins typically take a certain set amount of the commodity to create the base prices. With Goldcoin, for example, 1 ounce of physical gold is equal to 1000 Goldcoins.

What is even more illuminating is that gold can be fractionated using stablecoins, which means that more people can actively invest as they do not need to buy an entire gold bar. They can buy any number of gold-backed stablecoins they want.

Algorithmic stablecoins (backed by cryptocurrencies)

Instead of using commodities or fiat money as backing, algorithmic stablecoins use excessive collateral from other assets, such as Ethereum. This means that the platform or exchange issuing the stablecoin offers a ratio of more than 1:1 to over-compensate for the volatility the crypto asset may experience. Examples of algorithmic stablecoins include one of crypto’s original stablecoins, DAI and AMPL.

What’s next for stablecoins?

With the evolution of crypto markets and stablecoins becoming more and more of a mainstay, the millions of new crypto enthusiasts, investors, and traders have a well-established virtual on-ramp and off-ramp. It is not known what new functions and forms these valuable digital assets will take in the future, but we know that they are here to stay.

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