Cryptocurrencies have been around for over a decade, and it quickly became evident that a stable trading solution was needed- that’s where stablecoins came to play. Unlike traditional cryptocurrencies that are known for their volatile and dramatic fluctuations, a stablecoin – in theory – maintains a stable value since they are pegged to an asset. There are different assets that are being used such as 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 suffering the volatile fluctuations of the crypto market or having to take 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 use stablecoins to 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 and 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, and secondly, when you find a point of reentry, using a stablecoin allows you to move quickly – 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 being thrown around because there have been cases where stablecoin values have fluctuated above the minor fractions 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 funds to a stablecoin, it is good to remember the market could bounce back up and even surpass the value at which you moved to a stablecoin, and 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 are happy to hodl and cruise the highway taking on detours and traffic jams as they come and others use stablecoins as a safe place to pull over during hostile moments and merge back on when ready.
Stablecoins aren’t going anywhere as even central banks are looking to issue digital versions of their FIAT money ensuring they are tied to their very own currency. All in all, stablecoins are a great tool to help confidently adopt cryptocurrencies by providing a stable trading solution at points of increased volatility and it also serves as a great tool for money remittances around the world.