One of the things you’ll first notice when looking at cryptocurrencies is how diverse they actually are. There are over 6,000 cryptocurrencies, yes, 6,000, at the moment. Not all of them are trying to replicate “real” money.
Some coins are there for governance, others try to protect the privacy of users, while others still are meant to be used on specific platforms. Then you have stablecoins. These weird coins do not react like other cryptocurrencies at all, and you may be asking whether you should bother with them. In this article, we’re going to explain what stablecoins are, how they work, and how you can invest in them.
Stablecoins are coins that are pegged to certain commodities or currencies. A lot of them use the US dollar as a reference, but some stablecoins replicate the action of the pounds, rubles, shekels, etc. Their main goal is to counteract wild fluctuations in the cryptocurrency markets.
If you didn’t know already, cryptocurrencies are some of the most volatile assets you’ll find anywhere. And this has a lot of investors worried, which is legitimate. Stablecoins allow people to invest in crypto without having to deal with these ups and downs, but that’s not the only benefit.
Another reason to invest in stablecoins is that exchanging fiat for crypto is not always easy. In fact, many exchanges will make it impossible. Having stablecoins that are widely accepted by most exchanges means that you won’t have to worry about this. And your coins don’t risk losing 10% to 30% of their value while you sleep either.
There are tons of different stablecoins on the market, and they all act differently. Some might also be better depending on the type of backing asset you prefer. Let’s take a look at some of the main types of stablecoins you’ll find.
First, you have centralized stablecoins. If you’ve heard of Tether before, that’s an example of one. What differentiates those from other stablecoins is that they are backed by the asset they represent. Tether, for instance, is backed by an actual cash reserve that is stored in their vaults.
What this does is provide safety for investors who now know that each Tether is worth a dollar. The only issue with Tether, however, is that their vaults have never been fully audited and there’s no way to know if it’s backed 100%. Nevertheless, Tether is not only the most popular stablecoin by a long margin but it counts for more than 48% of crypto trading by volume.
Gemini Dollar, aka Paxos Dollar, is another popular stablecoin. This one was started by the blockchain startup Paxos in partnership with Coinbase. This coin has been popular with institutional investors since it’s much more transparent. They allow their reserves to be audited and are doing everything they can to be compliant. This one could start taking some of Tether’s market shares as it becomes less trusted.
Another centralized stablecoin you should know about is Filecoin. Filecoin is a bit different in that it is backed by USDC and their proprietary coin. The goal is to create a stablecoin that will be used on their platform and will support its development.
Some coins are attached to the price of gold. These are popular among investors that have less trust in the US dollar or fiat money in general. They all differ in forms and function, but in most cases, they use investment-grade gold as a backing asset.
CACHE gold is currently one of the most popular gold-backed stablecoins. Each CACHE is backed by one gram of pure gold. The gold is stored in vaults all over the globe. What’s great about CACHE is that it can truly be used as a gold equivalent since you can easily redeem them.
Tether also has a product that uses gold for backing. Paxos does as well. The difference is that they use one troy ounce of gold as a unit instead. One benefit is that they have a smaller minimum redemption than CACHE gold.
Some stablecoins use crypto assets as collateral. Since crypto is not the most stable asset out there, they use complex algorithms and supply and demand for stabilization. Coins like Luna, for instance, use assets tied up in smart contracts as collateral.
Some stablecoins will bypass collateralization altogether and rely solely on smart contracts. Some of them will automatically issue tokens when the supply is too limited or burn back when it’s too low to maintain a peg.
These are a bit more complex than other options but they do have some advantages. For instance, Tether had an issue back in 2019 when there were not enough reserves for the number of coins that were in circulation. This isn’t likely to happen with these types of stablecoins.
There are many questions you should ask and things you should ask yourself when picking the best stablecoin. The most important thing is assessing what you want to do with it. Do you want something you’ll be able to make transactions with as well? Do you want to use it to trade on top exchanges? Or maybe you simply want a store of value?
These are all things that will influence your choices. If you want a stablecoin that you’ll be able to use for transactions as well, then you need to look at things like translation speeds, fees, and adoption. If you want a store of value, then you need to go with a coin that you can trust with good security. You should also look at the people behind the project and the history of the coin. It would also be a good idea to look into the whitepaper in depth.
If you want to trade on exchanges, then you need to go with a stablecoin that is accepted virtually anywhere. This is one of the reasons Tether is so popular even though it has many issues and is not the most trusted. You can also look at proprietary stablecoins or coins that are backed by a major exchange, like Gemini Dollar or the Binance Coin.
Now that you know what stablecoins are, you need to know how you can buy them safely. The very first thing you’ll have to do is get yourself a secure wallet. Your best two choices are a cold wallet and a software wallet.
Cold wallets are usually the best bet if you want to store large amounts of crypto safely. But it’s not always the best if you want to make fast, regular transactions. So, a software wallet might be more suitable if you want to make quick trades. One thing you should never do, however, is trust an exchange with your money. Always have the money in your possession to avoid issues, as they’re not infallible.
The next step is picking a crypto exchange. You will need to take your time when picking those, as they are not all trustworthy and regulations surrounding them can greatly vary depending on the jurisdiction.
You also have to check if they have the stablecoin you want in the first place or if they have a proprietary coin that is similar. For instance, if you want something that follows the US dollar, most major exchanges will have at least one coin that does, so check what coin does this for any exchange you were thinking of using and look up the coin and its reputation.
If you’ve never opened an account with an exchange, be prepared to have to give a lot of information. You will need a full name, phone number, and email address at the very least. Most will ask that you verify your identity as well. They might ask for things like your social security number or an official document, like a passport or a driver’s license.
Next, you’ll have to make a deposit on your account. There are many ways that you can do so, but the most recommended is through a bank transfer. Note that it could take a long time for the account to be credited, and you may need to have the transfer approved by your bank, as these types of transfers can trigger their bank detection systems. Once you’ve transferred the money, you’re free to buy whichever stablecoin you want.
Not everyone needs to have stablecoins in their portfolio. If you’re confident in your crypto assets and you already have a great exchange that allows you to transfer fiat to crypto easily, then these aren’t necessary. But, if you’re a beginner and you know little about blockchain or the crypto markets, stablecoins are perfect for you. They’re also a great choice if you don’t want to have to be glued to your monitor all day.
Stablecoins can be a great option for those who want exposure to the crypto markets without the wild rollercoaster ride. Study them as much as you can and see how they can help you in your trading strategy.