The world of cryptocurrency is ever-evolving and always on the ball. Don’t worry though, when it comes to keeping up with new terminologies, you can bet we’ll be here to keep you updated. This is why today we’re excited to dive into the world of Stablecoins and let you know how they differ from Bitcoins and other cryptocurrencies. Ready? Here we go
What Are Stablecoins?
Before we get to Stablecoins, let’s first do a quick flashback on how cryptocurrency prices have swung back and forth owing to several different reasons. At its heart, cryptocurrencies are still volatile investments when it comes to pricing. This leads to hesitancy from established merchants into accepting them the same way as currency as the price of the same cryptocurrency can suddenly drop in value or skyrocket out of consumers’ reach.
Stablecoins essentially solve this problem by pegging their value to a stable currency such as the US dollar. The idea is that by being tied to a fiat currency, the price swings can be prevented. In essence, Stablecoins are cryptocurrencies that claim to be backed by fiat currencies—dollars, pounds, euros, yen, etc.
Now, if you’re wondering what’s the benefit of using dollar-backed or gold-backed cryptos instead of dollars or gold directly, we have two words for you – added costs. That’s right, from processing fees and other amounts, transacting using traditional methods can drive up costs if the amount of money is too large. Crypto exchanges also accept Stablecoins more widely than say, another speculative cryptocurrency, providing more bang for the buck in all ways.
Stablecoins can be centralized, such as Tether that launched in 2014 and is the third-largest cryptocurrency in the world by value. It is also the most popular one out there backed by a reserve of US dollars, essentially meaning Tether’s price is usually one USD.
However, crypto investors don’t completely trust Tether leading to competition in the form of Gemini Dollar and Paxos Dollar. These Stablecoins are backed by cryptocurrency backers Winklevoss twins and a listed crypto exchange Coinbase. They are also audited by top Wall Street firms that helps investors trust these Stablecoins even more.
For those who don’t trust US dollars, there are also gold-backed Stablecoins. The most popular one today is CACHE – each CACHE token is backed by 1g of pure gold held in the vaults stored around the world. There are other Stablecoins such as Tether Gold and PAX Gold that operate on a slightly different principle.
Finally, let’s talk about Terra and Ampleforth. These are two examples of algorithmic Stablecoins that use complex algorithms to keep themselves stable.
Stablecoins Vs Bitcoins
We’ve already established the volatile nature of cryptocurrencies like Bitcoin. Bitcoin is the most popular cryptocurrency that allows people to send payments directly via peer-to-peer system without any other financial institution in between.
Stablecoins, on the other hand, are a reassurance that your tokens are backed by something more tangible that can also be used for other economic activities in case you decide to cash out to dollars or gold.
Bitcoin prices are volatile but if history is any indicator, the world’s most well-known cryptocurrency is on course for a big jump in the future. Just five years ago, Bitcoin was priced at around USD $435 while today a single Bitcoin is priced at around USD $50,000. Higher Bitcoin prices translate to a bigger opportunity to make handsome returns. However, with Stablecoins, the price is fixed to the asset it is linked to and the chances for making handsome gains are reduced significantly.
Basically, Stablecoins are for those who want to enter the crypto space with a stable, real-world monetary asset such as currency or gold. They can be a great for those who are risk averse to dip their toes in the world of crypto. Bitcoins, on the other hand, works on its own trading platform and its price is decided by other factors within the system that can lead to great gains or temporary pains, depending on your risk appetite and exposure.
Which type of cryptocurrency would you like to invest in – Stablecoins or Bitcoins? Let us know in the comments below.
This is a partnered post.
First Published: IST