Stablecoins: What they are and why you could consider investing in them

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Cryptocurrency-backed stablecoins are issued with cryptocurrencies as collateral, conceptually similar to fiat-backed stablecoins. In many cases, these allow users to take out a loan against a smart contract via locking up collateral, making it more worthwhile to pay off their debt should the stablecoin ever decrease in value. In addition, to prevent sudden crashes, a user who takes out a loan may be liquidated by the smart contract should their collateral decrease too close to the value of their withdrawal. Stablecoins are
not intended to generate profits as they’re not a highly volatile
cryptocurrency (their value is pegged to their underlying fiat currencies). Stablecoins, unlike some cryptocurrencies that see price increase, seek to
maintain a continuous value. In certain circumstances, though, investors and
dealers use stablecoins as a temporary safe haven during market volatility.

Users have to trust that all the network participants will act in the best interests of the group as a whole, which is one of the big draws of cryptocurrencies in general. Stablecoins make up just one part of this burgeoning ecosystem, but their influence and adoption is growing rapidly. They are now supported by more cryptocurrency service providers than ever before, with a market capitalisation of just under $ 25 billion. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Crypto-backed
In this case, stablecoins are issued with cryptocurrencies as collateral instead of being backed by fiat currencies. The main idea here is to peg them to a basket of cryptos or a cryptocurrency portfolio. Since everything is done digitally on the blockchain, the system depends on the use of smart contracts to handle the issuance of units, ensure governance and establish trust. Because they are cryptocurrencies, stablecoins are based on widely used networks such as the Ethereum blockchain. Stablecoins aren’t subject to the direct control of a central bank such as the U.S.

Whether it’s the U.S. dollar or Dogecoin, a currency is most useful as a medium of exchange and a store of value. For that reason, policymakers aim to keep the price of traditional national currencies broadly stable. Stablecoins are a newer breed of cryptocurrency gaining popularity for their commitment to minimize the price volatility that has limited the use of Bitcoin (BTC) and other digital currencies as a medium of exchange. This type of stablecoin tries to mirror the mechanism behind the traditional central bank model, but with smart contracts instead of humans in charge. Instead of fiat currencies, however, they’re pegged to commodities—typically gold. For example, if Company B has $10 billion of their stablecoin in circulation, they will need to hold $10 billion or more in gold in their reserves for the stablecoin to be usable.

This quality, combined with the implementation of innovative payment solutions that use stablecoins as transport currency to facilitate crypto-fiat exchange, is what will drive future crypto development. This is a burgeoning business in the decentralized finance, or DeFi, sector. Depositors place stablecoins with lending platforms to take out loans in other cryptocurrencies, and the lender doesn’t have to fret about the collateral what is a stablecoin and how it works melting down because it’s pegged to a hard currency. Unlike Bitcoin and Ether, stablecoins are pegged to a reserve asset such as the U.S. dollar or gold, or in some cases, other cryptocurrencies. Those reserve assets drive the value of the stablecoin, so if the dollar goes up, so, too, does a dollar-pegged token. Holders of stablecoins should be able to redeem their tokens for the underlying asset when they choose.

  • Consult an attorney or tax professional regarding your specific situation.
  • However, it has been besieged by doubt around the reliability of its reserves for years.
  • USDT TRC20 is the version of Tether stablecoin issued on the Tron blockchain as a TRC20 token.
  • Though Bitcoin remains the most popular cryptocurrency, it tends to suffer from high volatility in its price, or exchange rate.
  • Tether Gold (XAUT) is one of the most popular gold-backed cryptocurencies.

We’ve all heard the perks of Bitcoin touted far and wide by tech bros and crypto nerds. If you invest in crypto wisely, your wealth can skyrocket—but you can also lose a lot. What scares many consumers and businesses alike away from cryptocurrency, in general, is its volatility—Bitcoin can lose thousands of dollars in value in a single day.

The dollars are added to reserves, while an equivalent amount of USDT is issued on the blockchain ledger. This USDT enters circulation when transferred to the buyer’s wallet address. Transaction
fees, interest on reserves, and possible issuance fees are common ways for
stablecoins to earn revenue. Some stablecoin ventures hope to make money by
generating interest on the collateral held in reserve.

Their rapid growth in popularity is also the result of stablecoins’ use as collateral by decentralized finance (DeFi) lending and staking protocols. Cryptocurrency-backed stablecoins are pegged to the value of an external cryptocurrency. This might sound a little solipsistic, but these stablecoins are usually overcollateralized in order to ease any price volatility in the coin they’re pegged to. For example, an issuer may require $1,000 in Ether reserves to back $500 worth of an Ether-backed stablecoin. While crypto-backed stablecoins aren’t quite as stable and easy as fiat-backed, they offer a much greater degree of decentralization, which is one of the main draws of using cryptocurrency in the first place. If the price falls below the value of the fiat currency, the token supply is reduced and vice versa.

In his semi-annual monetary policy report to Congress earlier this month, Federal Reserve chairman Jerome Powell said that stablecoins were in need of tighter regulations. In Tether’s case, this has never been conclusively provided, sparking rumors that the currency was unbacked and was in fact minted out of thin air. But cryptocurrencies are not issued by the state, which means that they must seek other avenues for price stabilization. The purpose of this website is solely to display information regarding the products and services available on the Crypto.com App.

what is a stablecoin in cryptocurrency

USD Coin presents substantial value to its users, primarily due to its stability in the volatile landscape of cryptocurrencies. Users can seamlessly transition their assets into USDC when the broader cryptocurrency market is undergoing significant price fluctuations, thereby safeguarding https://www.xcritical.in/ their capital from potential losses. However, unlike volatile cryptos, USDT is a stablecoin designed to have a stable value through US dollar reserves. USDT is listed as a trading pair on most major centralized crypto exchanges as well as decentralized exchanges.

what is a stablecoin in cryptocurrency

Staking carries risks, however, so make sure you read up on the specifics for the coin you intend to use. With the crypto boom of 2017 behind us, investors are increasingly looking to stablecoins as a safer way to experiment with the technology. In the first half of 2020, the supply of stablecoins swelled by 94% to hit $11 billion in June. The uncertainty surrounding price movements also means that the direction of trades can vary even within short periods of time.

Bitcoin, for example, can rise or drop by double-digit percentages in just a few hours. But this is now changing thanks to the increasing prominence of stablecoins, which are helping to alleviate concerns around volatility. There is no way for a user to be sure whether the issuer actually holds the funds in reserve, so the stability of the stablecoin’s price depends on their trust in the issuer. Most importantly, it makes them more viable as an actual currency because they aren’t subject to wild, daily fluctuations in price and are useful for all the things people actually want to use money for. As such, they can enable a number of practical use cases that traditional crypto-assets simply can’t – from insurance and loans, to payments and investments. The value of most cryptocurrencies is largely determined by what the market will bear, and many people who buy them are doing so in hopes that they will increase in value.

what is a stablecoin in cryptocurrency

Stablecoins
that are crypto-collateralized are vulnerable to significant market volatility,
which can lead to undercollateralization during market crashes. In May 2022, Tether’s price briefly fell to as little $0.96 following the collapse in the value of a different stablecoin, TerraUSD (UST), from an issuer not affiliated with Tether or BitFinex. The price of Tether tokens quickly rebounded to more than $0.99, and Tether said it was continuing to honor redemption requests at a 1-to-1 ratio to the U.S. dollar. Collateral must be held by a custodian and audited regularly to guarantee redemption of the stablecoin tokens. The world’s most popular cryptocurrency, Bitcoin, shot from less than $6,000 to more than $19,000 between mid-November and mid-December of 2017, then fell to about $6,900 by early February 2018. More recently, it surged from under $5,000 in March 2020 to over $44,000 by August 2021.