The volatility in the crypto markets is a big issue for investors and this is where stablecoins can prove to be helpful. They act as a much-needed antidote for the price volatility that is an inherent part of crypto markets. An underlying asset collateralizes most of these digital currencies for the purpose of delivering price stability. For instance, one of the most common types of stablecoins that you can find are the ones that are pegged to fiat currencies. Tether (also known as USDT) is a renowned stablecoin, which is backed with the US dollar on a 1:1 basis.
For every single unit of Tether that’s in circulation, financial service providers are required to set aside $1 and hold it in reserve. Some of the alternatives include USD Coin (USDC) and TrueUSD (TUSD). In recent years, there has been an explosion in the number of stablecoins that exist in the market, along with the quantity. It is also possible for people to find crypto assets that are pegged to other crypto assets or fiat currencies like the euro.
With this new technology, the possibilities appear to be endless. There are some stablecoin projects that have also tied their digital assets to other cryptocurrencies or even precious metals. There are also projects like the Libra stablecoin by Facebook, which intends to use a basket of various national currencies so stablecoins can act as a medium of exchange. It is exceedingly easy to purchase stablecoins and they are listed on most crypto exchanges, including Coinbase and Binance.
Main Use Cases of Stablecoins
There is an increase in trading volumes for stablecoins, which means that there are a number of real-use cases that you can get excited about. For instance, a number of financial institutions currently charge astronomical transaction fees when they are converting one fiat currency into another or making cross-border payments and the settlement time can stretch to days. But with popular stablecoins, transfers can happen on the blockchain instantaneously and a lot more cheaply.
Choosing the right kind of stablecoin can also serve as a much-needed safe haven against price-volatility in the short-term in the Bitcoin market. As a matter of fact, even some of the world’s biggest economies are considering introducing their own stablecoins, which are being referred to as central bank digital currencies, or CBDCs.
For financial institutions including the Bank of England and the People’s Bank of China, blockchain technology is becoming a vital part of the country’s monetary policy. A lot of these organizations are hoping that the much-needed modernization can be achieved through on-chain transactions, especially as smartphone wallets are becoming more popular than bank accounts.
Top Stablecoins in the Market
While there are a number of stablecoins to be found in the market, you need to know the top ones, especially when you are interested in investing in them. Some of the choices you can explore are:
Tether Stablecoin: USDT
As mentioned earlier, Tether is a stablecoin that’s pegged to the US dollar and as of January 8th, 2021, it was ranked third on CoinMarketCap. A company based in Hong Kong, also known as Tether, issued the stablecoin. Originally, the company claimed that every USDT was backed by a single USD, but since then, they have said that a fractional reserve system exists.
This stablecoin has become one of the most popular ways for crypto traders to move in and out of the crypto markets. It is widely available and new USDT are often printed, but this can be a bit controversial. Even though Tether is used by a lot of people because of its convenience, the company has been involved in various lawsuits over the years because of alleged market manipulation. Tether can be bought on a variety of exchanges, which include HitBTC, OKEx, Huobi Global and Binance.
Binance Stablecoin: BUSD
Introduced by one of the top crypto exchanges Binance with Paxos, Binance USD, as the name indicates, is also a 1:1 USD-backed stablecoin. The price of this stablecoin is always $1 and it is regulated by the New York State Department of Financial Services. It is possible to buy this stablecoin on the Binance crypto exchange and you can also redeem it from Paxos. The function of BUSD is the same as any other stablecoin, which means it also helps crypto traders in navigating the volatile crypto markets by offering a crypto that comes with a stable price.
Gemini Stablecoin: GUSD
The Winklevoss twins founded the Gemini crypto exchange and it issued a stablecoin, which is known as the Gemini Dollar (GUSD). The stablecoin is available for purchase on the Gemini exchange and it offers tokens with the ERC-20 standard on the Ethereum network and this offers price stability in the crypto markets. The 1:1 price peg of the Gemini stablecoin is audited on a monthly basis by a public accounting firm that’s registered independently.
Coinbase Stablecoin: USDC
Known as USDC, the Coinbase stablecoin was introduced by Coinbase, the renowned crypto exchange, and Circle, a payments company. It is part of the Centre Consortium and its price is also $1. Founded in September 2018, USDC had the aim of providing traders with a safe haven in times of volatility, but that’s not all. Its purpose is also to let businesses accept payments in the form of crypto because of the stable price of USDC. Both Coinbase and Circle are regulatory compliant and the 1:1 USDC to USD peg is also verified by a prominent accounting firm. It is possible to purchase USDC on Coinbase of course, but other exchanges can also be used. These include Bitfinex, OKEx, Binance, Poloniex, and even decentralized exchanges like Uniswap.
You can go over the various stablecoins that are available in the market and then consider the ones you are most interested in. If you want to avoid the volatility in the crypto market, investing in stablecoins is the way to go. But, it is also important to be aware that they are not without their risks.
What are the Disadvantages of Stablecoins?
It is a well-known fact that cryptocurrencies, such as Bitcoin, are completely decentralized in nature, but the same is not true in the case of stablecoins because the underlying assets they are pegged to have to be held in reserve. It is a big challenge to ensure that these digital currencies are collateralized properly. In fact, Tether has had to deal with some legal action in New York after claims that the stablecoin may not be backed with the US dollar 1:1.
Next, there is also the issue surrounding related to regulation. A number of central banks had alarming reactions when Facebook announced Libra, as they feared that this digital asset could trigger an economic crash by undermining the sovereignty of fiat currencies. Ultimately, it might take a little bit of time for these stablecoins to achieve the same kind of widespread adoption that cryptocurrencies have managed to achieve and become mainstream. The Libra project is also facing problems and has been renamed, but its eventual launch could certainly work in favor of stablecoins as a whole. Likewise, the introduction of CBDCs by countries around the globe will also be beneficial for their adoption and use.