Bitcoin remains the leading cryptocurrency in 2021 with a total market capitalization of nearly a trillion dollars. Although that is the case, the top traded digital asset by volume is a stablecoin. You may have heard of stablecoins such as Tether, Gemini Dollar, TrueUSD, DiamDexx, and USDC, but what exactly are they? Are stablecoins cryptocurrency? Does the value of stablecoins fluctuate? How do they work?
Cryptocurrencies have been around for over a decade, and it quickly became evident that a stable trading solution was needed. That’s where stablecoins come to play. Unlike traditional cryptocurrencies that are known for their volatile and dramatic fluctuations, a stablecoin – in theory – maintains a stable value. This is because they are pegged to an asset. There are different assets that are being used: gold, the US dollar, diamonds, oil, or any other hedge-able asset. Since cryptocurrencies can’t guarantee short-term stability, many investors and institutions look to stablecoins as a more risk-averse solution.
Are stablecoins a cryptocurrency?
The number one traded cryptocurrency by volume is a stablecoin – Tether or USDT. Stablecoins are used to pick a point to reenter the market without taking your assets off the blockchain rails. Let’s say you have one bitcoin worth $50,000, and one day the value of bitcoin begins to plummet; in this instance, you can pick a point to reenter the market by moving your funds to a stablecoin. No matter if the value of one bitcoin drops down to $30,000 the stablecoin maintains its value at $50,000; you are free to reenter the market at any point. Stablecoins essentially provide stability in times of turbulence and allow for fast settlements across the globe.
Why wouldn’t you want to cash out to FIAT instead? Firstly, because when you cash out to FIAT your funds become taxable. Secondly, when you find a point of reentry, using a stablecoin allows you to move quickly. In fact, their very purpose is supported by not cashing out.
Does the value of stablecoins fluctuate?
Although stablecoins maintain a stable and regulated character, they are still reliant on the asset that they are pegged to. This means they tend to have a collateralized nature and that can be risky. In theory there should be a one-to-one ratio, stablecoin-to-asset (e.g. 100 stablecoins = 100 USD). The term “in theory” is because there have been cases where stablecoin values fluctuated more than they normally do. For instance, when TrueUSD got listed on Binance, the value went up 134%; this should never be the case and only proves stablecoins can be sensitive to trading activities as well.
Stablecoins are a tool for reentering the market at moments of increased volatility. Jumping in and out of stablecoins during minor market fluctuations can be risky. When moving to stablecoins, remember the market could bounce up or even surpass the value when you moved. The value of your funds at reentry will have dropped. A metaphoric way to perceive stablecoins is to imagine the blockchain is a highway. Some people are happy to hodl and cruise the highway taking on detours and traffic jams as they come. Others use stablecoins as a safe place to pull over during hostile moments and merge back on when ready.
Stablecoins aren’t going anywhere. Some central banks are issuing digital fiat tied to their own currency. Stablecoins are a great tool to push cryptocurrency adoption by providing a stable trading solution at points of increased volatility. Furthermore, it also serves as a great tool for money remittances around the world.