Stablecoin is a cryptocurrency created to keep its value stable. They need a backup to maintain this small volatility in market prices. The backup relationship is made with other financial assets, fiat currencies, raw materials and even other crypto assets.
In this guide, you can find answers to questions such as what is a stable coin, what is a stablecoin for.
What is a stable coin and how does it differ from other cryptocurrencies? Let’s take a look at how stablecoins differ from other cryptocurrencies and try to explain why you should invest in stablecoins.
All the fluctuations in the cryptocurrency world are causing everyone in the market to look for ways to find price stability. Investors have had a variety of options for finding a more stable asset, including buybacks into fiat currency, for some time now, but how about holding their holdings in cryptocurrency markets? This is where “Stablecoin” comes into play.
Traditional Cryptocurrencies and Stablecoins
There are always differences between cryptocurrency projects and what specific cryptocurrencies can offer, but Stablecoins offer an entirely new advantage over traditional cryptocurrencies. When we compare the two directly, the biggest difference is the reduction of volatility.
Traditional Cryptocurrencies
Most investors are already familiar with traditional cryptocurrencies. Looking at the history of the movement and the underlying Blockchain technology, we know that the value and price attributed to cryptocurrencies is due to the acceptance of cryptocurrencies in the markets. This results in an open door for harsh price action.
To better understand the importance of the difference between stablecoin and traditional cryptocurrencies, investors need to know how cryptocurrencies work. Knowing and understanding the technology behind the new asset class is already a prerequisite for most investors to help gain greater insight into better investment decisions.
Once you understand the basics of traditional cryptocurrencies, it is extremely easy to understand why stablecoins exist and why they are needed in the market.
However, the main difference between Stablecoin and traditional cryptocurrencies is that traditional cryptocurrencies are not “backed” by anything like fiat. Instead, the value of the cryptocurrency depends on its use case and acceptance by others.
Stablecoins
Unlike traditional cryptocurrencies, Stablecoins offer a new way for investors to protect their funds from volatile markets. Stablecoin offers all the traditional benefits of cryptocurrencies such as Blockchain technology, distributed ledger and a decentralized network, but with one difference: asset support.
Stable Coins are not only dependent on the utility and acceptance of their value. Instead, they are like the original fiat currencies backed by gold. Stablecoins are a cryptocurrency that is “pegged” to another asset. This asset can be backed from a fiat currency (like Tether tied to the US dollar) to precious metals (like Quintric tied to gold and silver).
Stablecoin Offers Intrinsic Value
These coins offer significant intrinsic value to each coin and coin as they represent ownership of another asset. For example, a gold-backed cryptocurrency always represents a minimum amount of value: a specific gold value. Even if they are rejected from the markets as a whole due to this support, the backed assets are still worth the amount of gold each represents.
There are several different ways to run a pegged asset, but there is usually a certain amount of money available to purchase. The institution/organization that issues stablecoins has a corresponding amount of assets to store for its value. When done correctly, investors can go to the authority and get the cryptocurrencies they claim for the tangible asset.
The Importance of Stablecoins
Investors who have a stable price cryptocurrency in a portfolio have the opportunity to protect their investments from serious price movements during uncertain times in the market. These cryptocurrencies play a very important role for investors and traders to reduce risks.
Stable Coin Advantages
Stablecoins offer many advantages to users.
Safe Haven Asset: Stablecoins have a value designed to be stable over any period of time. This feature makes stablecoins an ideal safe-haven asset because unlike cryptocurrencies like Bitcoin, which can fluctuate dramatically every day, a person using stablecoins to store value does not see any risk of loss, especially since they have full protection of their assets. The importance of both the price stability and self-healing nature of stablecoins is exemplified by the political-economic crisis in Venezuela, where many citizens who have fled the country recently kept their savings in Bitcoin to avoid confiscation of their fiat money.
Trading: Stablecoins are often used in trading. At the time of writing, Tether, the largest stable coin by market capitalization, was used in 40% of transactions on Binance, the world’s two largest exchanges, and 80% of transactions on Huobi.
Payments: Payments will be one of its primary use cases for years to come, as Walmart has announced a patent for its own stablecoin project. Businesses benefit from accepting stablecoins as payment. Because in doing so, financial institutions do not pay the 2-3% transaction fees that accompany the intermediary transaction fees.
Remittance: Cross-border payments and remittance are one of the most real problems that workers abroad face when trying to send money home. Sending money internationally comes with high fees. For example, most migrant workers in Asia send home approximately $200 per month. But they need to pay 12 dollars as international transfer fee. For most people, this equates to half the daily wage. But stablecoins get in the way.
24/7 Availability: When payments or transfers are made in fiat, they are usually not immediately delivered as they are subject to normal bank hours. However, stablecoins work 24/7 as they run on the blockchain, not a central financial institution with business hours.
Escrow: Stable coin fully automates the escrow process through smart contracts that programmatically evaluate escrow terms without the need for institutional intermediation. Because smart contracts using stablecoins are on the blockchain, they can be fully and publicly audited.
High Speed and Low Fees
Higher Speed: Stablecoins make various financial processes faster. Barter and banking with stablecoins allow for round-the-clock transactions, as the blockchain operates independently of a central institution with set hours.
Lower Fees: Credit card processing fees at major credit card companies like Visa, MasterCard, and AmEx average about 2 percent per transaction. For this reason, many small businesses charge customers more for credit card purchases. It prohibits the use of certain higher priced cards and even takes cash only. However, these high transaction costs can be overcome with the use of stablecoins, which provides value for both businesses and customers.
Boundless: The ability of cryptocurrencies to be an anonymous, unlimited store of value has proven to be a real-world necessity for millions. In Venezuela, people cannot flee the country with their nominal money. They cannot send internationally through their banks and cannot physically carry their money with them as it will be confiscated at the border. When this was the case, Venezuelans turned to Bitcoin. However, stablecoins are a more important investment vehicle as they are not subject to speculative markets or wild inflation.
Transparent: Transactions on the blockchain can be viewed from a blockchain browser by anyone with internet access. Also, stablecoins can offer full transparency as long as they are backed by regular audits by Stably. As trust in Tether eroded, cryptocurrencies began to emerge that offered more transparency to circumvent it.
Programmable: Because stablecoins are basically code, they can be added with features to adapt to changing needs. For example, loyalty programs can be embedded in branded stablecoins such as Walmart’s upcoming stablecoin.
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