Stablecoins are a hot topic these days. With the stablecoins universe reaching a $40 billion supply in January 2021 and more than $200 billion monthly transaction volume, it is no surprise that apart from crypto investors, even top regulators are talking about stablecoin.
From the name itself, stablecoins are cryptocurrencies that have no volatility— it’s stable. Although it holds the same power as other cryptos out there, its value is steady just like the traditional currency we know (e.g., USD, Rupee, Euro, Swiss Franc).
Perhaps, stablecoins are the future of everyday financial services. Stablecoins are springing up as the private sector’s answer to central-bank virtual currencies, comparable to Facebook-backed Diem and PayPal.
Stablecoins have come into existence for seven years, yet it was only widely recognized in the past few months. Now, let’s dive into the reason why stablecoins are suddenly in the headlines.
Stablecoins Overview
We all know that the price of cryptocurrencies is extremely volatile and always varies in just a short span of time, as well as it easily gets affected by external factors.
Take Dogecoins for example. Just a single tweet from the world’s wealthiest, Elon Musk, can either dramatically increase or decrease the Doge’s prices by as much as 100%.
On the other hand, just like what we’ve mentioned earlier, stablecoins are not volatile. Because of that, you have a great opportunity of maximizing your protection against market fluctuations.
The Steady Price of Stablecoins
Money should have an unvarying value. Just imagine what would happen if it doesn’t.
You have $1 now, then an hour later it goes down to $0.5, then the next day it goes up to $0.75, there’s no guarantee that you will really be able to use it to buy cryptocurrencies or anything. This is how it works with other cryptos.
Stablecoins are created to solve the problem of market volatility, allowing digital money to have a consistent price.
Stablecoins is also a cryptocurrency so can it stay clear against the extreme volatility in the crypto space? Well, the two types of stablecoins might be the answer to this question.
Stablecoins come in form of a national currency or cryptocurrency depending on the collateral.
The collateralized stablecoins are tied to a traditional currency like the US dollar, having an issuer support the value of the coin. On the other hand, stablecoins can also be linked to the price of crypto assets like Ether.
Some stablecoins make use of algorithms to oversee the supply and demand of the coin, making the number of coins in the circulation match what’s kept in reserve.
Although the US dollar could serve its purpose directly, people are still using stablecoins because of its institutional features that people find valuable.
There are added costs to trade its cryptos for dollars, as well as there’s no processing dawdle when it comes to dollar withdrawals. The fees are also frequently fended off there the owner withdrawals are large.
Moreover, there’s a great favor for stablecoins across the transverse section of cryptocurrency exchanges. Some crypto exchanges that possess trusted volume do not bestow investors with any ramp-up for dollar trading. Instead, they solely accept stablecoins as a sustainable medium of exchange.
Stablecoins and Cryptocurrency Prices
Since there is no solid rule and directive associated with cryptos, the prices can be pretty unstable.
Volatility drives the prices of the market, at the same time, it is also the result of the absence of public confidence in cryptocurrency’s reliability. Because there’s an insufficient structured framework, people are having sundry opinions about them.
Investors often view cryptocurrencies as speculative investments, so they tend to plum for a safer investment choice like stablecoins. Yet, Bitcoin’s big investors might have a sprightly role in cryptocurrency prices.
If individuals who have enormous Bitcoin holdings want to turn their crypto assets into stablecoins, cryptocurrency prices go to a downhill trend. Hence, the prices of cryptocurrencies are extremely dependent on stablecoins.
Leading Stablecoins
There are numerous stablecoins as of today, and the main account is on Tether, the third biggest crypto in the world when it comes to market value.
Cryptocurrencies frequently fluctuate while Tether’s price is typically around $1.
Traders in the crypto space usually use Tether to purchase cryptocurrencies as an option against the US dollar, providing them with a scheme to be a stable asset especially times of great volatility in the cryptocurrency market.
Tether keeps US dollars in a bank account, The amount must be equivalent to what they issue to preserve order within the system.
The leap up of US dollar collateral on prominent exchanges compelled Tether to be the MVP in cryptocurrency trading, beating Bitcoin.
There is about 60% volume denominated in Tether, and 4% in the other stablecoins. Even so, there is disputation surrounding Tether, saying that the issuer isn’t in possession of enough dollar reserve to take accountability for its dollar peg. Who knows?
Future of Stablecoins
Stablecoins uprising has exploded since 2019, spiraling from just a couple of billion dollars per day to $100 billion in April 2021, smashing a new record of $250 billion in mid-April.
Blockchain played a huge role in cutting down charges in today’s expensive payment system. The process is also way faster compared to banks, and it’s 24/7 open!
Adaptation of stablecoins is getting more and more widespread and even household companies like Visa and PayPal acknowledged accepting payments through it.
While stablecoins are extending out real fast, the shortfall of governance is something to be wary of. The future of stablecoins may seem so bright, but if you plan to invest in them, make sure you have done your research.
Don’t put a seed in the ground if you don’t know how to plant it.
