Stablecoins are digital tokens that are pegged to a stable asset, such as the U.S. dollar or gold, to give cryptocurrency investors a way to store value in something other than volatile digital tokens. The idea is to provide stability for crypto investors who may not be interested in investing directly in volatile and unpredictable coins like bitcoin or ethereum but want the same benefits of blockchain technology, such as fast and cheap transactions with no third parties involved. With so much attention on cryptocurrencies, digital tokens with volatile prices are often out of favor with cautious investors. However, some find the idea of buying into an asset that has already proven its long-term value in gold or fiat currency unappealing. Stablecoins are an answer for those who want the stability of real-world assets without directly owning them.
Stablecoins Guides
How do Stablecoins Work?
Stablecoins are designed as digital tokens pegged to a stable asset, such as the U.S. dollar or gold, to give cryptocurrency investors a way to store value in something other than volatile digital tokens. The reason behind this is to provide stability for crypto investors who may not be interested in investing directly in volatile and unpredictable coins like bitcoin or ethereum but want the same benefits of blockchain technology, such as fast and cheap transactions with no third parties involved. A few examples of stablecoins include True USD (TUSD), Dai (DAI), and USD Coin (USDC). Each of these stablecoins is backed by an asset, such as U.S. dollars, to ensure that the coin’s value remains consistent. If the coin’s value fluctuates too much, people who own the stablecoin can redeem it for the asset it is pegged to.
Basics of Stablecoins
A stablecoin is a digital token that is pegged to a stable asset, such as the U.S. dollar or gold, to give cryptocurrency investors a way to store value in something other than volatile digital tokens. The idea is to provide stability for crypto investors who may not be interested in investing directly in volatile and unpredictable coins like bitcoin or ethereum but want the same benefits of blockchain technology, such as fast and cheap transactions with no third parties involved. A few examples of stablecoins include True USD (TUSD), Dai (DAI), and USD Coin (USDC). Each of these stablecoins is backed by an asset, such as U.S. dollars, to ensure that the coin’s value remains consistent. If the coin’s value fluctuates too much, people who own the stablecoin can redeem it for the asset it is pegged to.
Pros and Cons of Stablecoins
Stability – Security of your money and value is one of the major advantages of using stablecoins compared to other cryptocurrencies. Convenience – You don’t have to go through the process to buy and store physical gold or silver as you would with other types of stablecoins. Investability – Once regulation of stablecoins becomes more standard, they could be used as a much more accessible investment vehicle to get into the crypto space. Transparency – Ownership of a stablecoin is fully transparent. You can see where it is and what it is being used for.
What to Watch for in Stablecoins
While stablecoins have many of the same benefits as cryptocurrencies, keep in mind that you are always tied to the fortunes of the asset to which it is tied. If the asset in question has a large fluctuation in price, you will see a similar change in the price of the stablecoin. Remember that stablecoins are still relatively new and untested, so there are bound to be some issues in their evolution. Make sure you read up on any stablecoin before you invest in it.
The Bottom Line
Stablecoins are a new and interesting asset that has the potential to greatly change the crypto space as we know it. While they do not have the same benefits as cryptocurrencies, they have a lot of advantages as well. If you’re looking to invest in the crypto space, but are worried about volatility in the market, stablecoins could be a great option for you.