Understanding the Domain of Stablecoins
Stablecoins are digital currencies with prices that are intended to be tied to other fiat currencies, , or exchange-traded commodities. Cryptocurrencies known as Stablecoins make an effort to tie their market price to an outside standard. As a medium of exchange, Stablecoins are more advantageous than more volatile cryptocurrencies. There cryptocuyrrencies can be linked to the value of a commodity, like gold, or to a currency, like the U.S. dollar. By keeping reserve assets on hand as collateral or by using supply-controlling algorithmic formulas, Stablecoins aim to maintain stable prices. Click Here if you are interested in Bitcoin trading.
Other types of collateral can be commodities like crude oil or precious metals like gold or silver, but the majority of fiat-collateralised Stablecoins have U.S. dollar reserves.
Regulators continue to closely monitor Stablecoins in light of the market’s $130 billion sizes, which have grown quickly, and its potential to have an impact on the larger financial system. The code and related agreements are kept on a decentralised, distributed blockchain network. Transactions are traceable, and the code governs how the contract is executed.
Stablecoins: are they a wise investment?
Most cryptocurrencies lack the stability required to be used as actual money. But Stablecoins make up for some of that lack. However, those who use Stablecoins should be aware of the risks involved. Most cryptocurrencies lack the stability necessary to be used as genuine money, however, stablecoins make up for part of this deficiency. But individuals who use stablecoins should be aware of the dangers they take before utilising them. Owners of Stablecoins should carefully consider what exactly is backing their currency. Many stablecoins like that of Tether had to face various criticisms in the trade market for disclosing their reserve details. The company revealed in its reserve report for the period ending March 31, 2021, that it had more reserves than liabilities. There is no assurance that a Stablecoin will have enough cash to redeem its reserves unless it commits to retaining 100 per cent of its deposits in cash.
Stablecoin investment risks include:
Stablecoins might appear to be a low risk at first glance. They are compared to well-known cryptocurrencies that have no backing. However, Stablecoins come with some standard crypto risks as well as at least one unique risk of their own:
- Security: Stablecoins need to be stored somewhere, just like other cryptocurrencies, whether it’s in your personal digital wallet, with a broker, or on an exchange. And yet, the wallets and other storage spaces cannot provide enough security to the Stablecoins due to the high risks involved in the process. The moment you step into the cryptocurrency trade market, you are quite vulnerable along with your virtual assets due to the presence of the hunter-like hackers and cyber criminals waiting right there for you to steal your digital assets in no time.
Conflict of interest: The bank possessing the reserves and the company issuing the Stablecoin are just two of the many parties you deal with in a transaction, despite the fact that cryptocurrency may appear to be highly decentralised.
Which Stablecoins are most widely used?
Because Stablecoins don’t provide the same kind of “get rich quick” opportunity as other cryptocurrencies, they typically don’t receive as much press (or hype). But as of May 2022, the following few Stable cryptos are among the most well-known cryptocurrencies by market capitalisation:
- Tether (USDT): $82 billion
- USD Coin (USDC): $49 billion
- Binance USD (BUSD): $17 billion
Of course, these coins are dwarfed by the biggest ones, like Bitcoin, which has a market cap of close to $560 billion, and Ethereum, which is worth more than $242 billion.
What makes Stablecoins useful for cryptocurrency trading?
Stablecoins address one of the major issues with many widely used cryptocurrencies, namely the fact that their extreme fluctuations make it difficult, if not impossible, to use them for legitimate transactions. The use of Stablecoins with smart contracts is also possible. Apart from preventing disputes that might occur when attempting to deal with more volatile cryptocurrencies, the digital currency’s stability also helps. Additionally, because of their stability, many Stablecoins can be used as a form of currency in a cryptocurrency brokerage.
Thus, all of the above factors indicate you to at least try out Stablecoins for once in a life time. However, you should be cautious while dealing with the various risks of the trade market.