The cryptocurrency market is volatile, to say the least. Bitcoin prices can fluctuate by as much as $1,000 in a single day, and similar fluctuations are not uncommon for other cryptocurrencies. This volatility makes it difficult to use cryptocurrencies as a currency or even keep them as investments over time.
You never know when your Bitcoin will be worth $100 more or less than it was yesterday. As a result, many investors are looking towards stablecoins as an alternative: digital currencies that maintain a stable value over time.
In this article, we’ll discuss stablecoins and how they work.
What are stablecoins
Stablecoins are cryptocurrencies designed to minimize volatility. They’re a relatively new type of cryptocurrency that should provide stability as an asset class and serve as a safe store of value for cryptocurrency investors. As such, they can act as a hedge against the price fluctuations seen in more traditional digital currencies like Bitcoin or Ethereum.
Stablecoins have not yet made much headway into mainstream use cases beyond their initial purpose of hedging against volatility in other cryptocurrencies. However, their unique properties make them potentially useful for other applications requiring a fixed price point.
How do stablecoins work
Stablecoins are designed to be pegged to a stable asset such as gold or the US dollar. The monetary policy behind these coins works by combining algorithms, trading, and arbitrage to keep the price of a stablecoin in line with its peg. As a result, their value is less volatile than other cryptocurrencies.
Stablecoins are cryptocurrencies that are backed by a fiat currency or another cryptocurrency. The idea is that they’ll be more stable than other cryptos and thus useful for everyday transactions like buying coffee.
The most basic type of stablecoin is one backed directly by a fiat currency or another cryptocurrency. For example, Tether (USDT) is pegged to the US dollar, with each USDT worth about $1 in US dollars. Note that this peg was put into doubt recently due to Tether’s lack of transparency regarding its reserves. Another example is Gemini Dollar (GUSD).
Are stablecoins safer than other cryptocurrencies?
You may have heard that stablecoins are safer than other cryptocurrencies, but is this true? While it’s true they are an asset class and not a substitute for fiat currency, they aren’t actually a store of value or speculative investment.
So yes, they’re safer than investing in other cryptocurrencies—but only by comparison. If you want to invest in something that will rise in value over time (like Bitcoin), look elsewhere.
Why are there so many stablecoins?
If you’re new to the world of cryptocurrencies, you might wonder why so many stablecoins are on the market. You may also wonder how these coins differ from each other and what their future holds.
Here’s what you need to know:
- there are many different types of stablecoins. The most popular are USD-pegged tokens that follow a 1:1 ratio with the US dollar (such as USDT), but there have also been efforts at creating gold-backed coins (GUSD), crypto backed by real estate (REAL), and even fiat currencies like the British pound sterling (£GBP);
- the number of stablecoins is growing rapidly as more people become interested in this new technology. As awareness grows among investors and regulators, experts predict that crypto users will move away from volatile cryptocurrencies like Bitcoin towards more solid options like GUSD or TUSD if they want something safe for their money.
Stablecoins have a lot of different features and functions. But the goal is always the same: to create a digital currency that doesn’t fluctuate so much in value that it becomes unusable as money.
Read also: How to create a cryptocurrency and how much does it cost? 7 steps to create one as a beginner