Cryptocurrency is a new investment frontier. This form of investing includes many unknowns, much risk and some new concepts and terminology to learn, but if you take the time to understand cryptocurrency and learn how it works, you will also open the door of opportunity for huge rewards.
One term more frequently mentioned in the world of cryptocurrency is stablecoins. This form of cryptocurrency is a little different from your average digital currency. Here we will discuss what stablecoin is, how it differs from other cryptocurrencies, and what are the most popular stablecoins. This will give you a better idea of why stablecoins are important to investors.
What is Stablecoin?
Stablecoin is a form of cryptocurrency. It is digital and based on blockchain technology like other cryptocurrency but what makes it different is that some type of reserve asset backs it. This makes it more akin to fiat currency and, as the name suggests, more “stable” than other types of cryptocurrency. This makes stablecoin very interesting to investors.
How is Stablecoin Different Than Other Cryptocurrencies?
Stablecoin offers many of the same benefits as other, non-stablecoin cryptocurrencies. The difference is that it is very secure. The use of Stablecoins is much more private than traditional forms of currency. The biggest difference comes when you look at investing and trading Stablecoins. As this day trading guide from Cove Markets notes, Stablecoin has grown in importance for investors as is a direct result of its differences from other cryptocurrencies.
Non-stablecoin cryptocurrency is volatile. Even the world’s most popular cryptocurrency, Bitcoin, is prone to wild swings. It is not uncommon for the price to go up or down by hundreds or even thousands of dollars in a day or week. In one recent three-month span, the price of Bitcoin jumped over 300% only to fall by almost the same amount and settle at a 15% overall gain.
Because Stablecoin is backed by some type of asset, that asset generally protects Stablecoins from the wild swings you see in other cryptocurrencies. Also, the fact that there has to be some sort of centralized body providing the backing assets means that there are people in charge of managing supply and demand to keep the currency stable when swings occur. This is a major difference from completely unregulated cryptocurrency.
How are Stablecoins used?
Stablecoins are usually used in a few specific ways. The first way – which illustrates the biggest potential of stablecoins – is as an actual currency. Spending standard cryptocurrency can be tough because mainstream institutions are hesitant to accept it. This is because it is hard to assign a real value to it when selling goods and services since the value is so unpredictable. With a more concrete value, stablecoins have the most potential to be commonly used in everyday e-commerce transactions in the near future.
Stablecoin is often also used to represent the asset that backs it. One example of this is certain stablecoins that are backed by the US dollar and listed on exchanges where the USD is not. Also, it can be used as currency when trading on a cryptocurrency exchange so you don’t have to convert your money back and forth between fiat currency and cryptocurrency.
What are the Most Popular Stablecoins?
Many stablecoins that have been launched. Some have failed, and many are still in development. Here are a few of the most widely used and best-known stablecoins available today.
Created in 2014, this was one of the first and is currently one of the most widely used stablecoins. It is backed by the US dollar and is commonly used to transfer value between exchanges without having to convert the value into fiat currency or unstable cryptocurrency. Although there have been some bumps for this stablecoin along the way, it remains the most popular one to date.
As you may have guessed from the name, these stablecoins are backed at a 1:1 ratio with the US dollar. It is another tried and trusted stablecoin. The company is all about transparency. They submitted to their first audit in 2018 and are regularly verified by third parties. They also regularly publish their company reports on social media.
This is an example of a crypto-collateralized stable coin. As opposed to a fiat-collateralized stablecoin that is backed by a fiat currency, Dai is mainly backed by another cryptocurrency. In this case, it is backed by ethereum’s ether. Because this cryptocurrency is highly volatile, more cryptocurrency is required to back up this stablecoin to account for swings in value.
This stablecoin is interesting because it was created by a firm founded by the Winkelvoss twins (of early Facebook fame) and because the State of New York helps support it. Gemini stablecoin is supervised by the New York State Department of Financial Services (NYDFS) and the account that holds the backing dollars is secured by the FDIC.
While most of the top fiat-collateralized stablecoins are backed by the US dollar, this one is backed by the Euro. Launched in 2018, the issuing body is based in Malta. It was conceived and created to help the Euro challenge the US dollar’s dominance in many markets.
The most well-known and widely discussed stablecoin in the world doesn’t actually exist yet. Libra is the stablecoin proposed by Facebook that may finally push stablecoins into mainstream use. However, the project has been plagued by criticisms and regulatory issues raised by the U.S. government and others. Whether it can get off the ground or not and in what form will most likely go a long way in determining how fast and far-reaching broad adoption of stablecoin will be.
Stablecoin may be the future of cryptocurrency in the real world. Although it may not make you an overnight millionaire like Bitcoin, it is something all investors need to understand. It is a vital part of the cryptocurrency ecosystem that has the potential to grow exponentially in popularity.