Cryptocurrency quotes are known for their high volatility. However, stablecoins are an exception, maintaining a stable price due to their unique structure.
What Is a Stablecoin?
A stablecoin (from English stable coin) is a type of cryptocurrency pegged to the value of an underlying asset, be it a fiat currency (e.g., the dollar), another cryptocurrency (e.g., Bitcoin), a commodity (e.g., oil), or securities (company stocks). This peg helps maintain a relatively stable price, making stablecoins less susceptible to market fluctuations compared to traditional cryptocurrencies.
Differences Between Stablecoins and Traditional Cryptocurrencies
The primary distinction between stablecoins and regular cryptocurrencies lies in their issuance process. While traditional cryptocurrencies are mined through decentralized algorithms, stablecoins are issued by specific organizations on existing blockchains (e.g., Ethereum).
Roman Nekrasov, co-founder of Encry Foundation, emphasizes that many cryptocurrencies are mined before their public launch, but their operation depends on nodes or validators that ensure decentralization. In contrast, stablecoins differ in that their issuers disclose information about the collateral backing the issued coins.
Stablecoins play an important role in the cryptocurrency world by offering more stable and predictable prices due to their ties to real assets. Despite this, like all cryptocurrencies, they remain high-risk instruments. Investors choose stablecoins for their stability and lower volatility, making them an attractive option for various financial strategies.
Types of Stablecoins and Their Applications
Classification of Stablecoins
By Collateral
- Fiat Currencies:
Example: Tether (USDT), Euro Coin (EUROC).
Description: Pegged to fiat currency exchange rates (most often to the US dollar). Issued by governments or private companies, ensuring their stability. - Cryptocurrencies:
Example: Wrapped Bitcoin (WBTC), DAI.
Description: Pegged to the exchange rates of popular cryptocurrencies. Although more volatile, they allow for hedging risks associated with fiat currencies. - Commodities:
Example: Tether Gold (XAUT), Petro.
Description: Backed by precious metals, oil, or other raw commodities. The volatility of such stablecoins depends on the price of the underlying commodities. - Algorithmic:
Example: Frax (FRAX), TerraUSD (UST).
Description: The exchange rate is maintained through the issuance and redemption of related cryptocurrency. These are the riskiest stablecoins but theoretically can offer higher profits.
By Management System
- Centralized:
Example: USDT, USDC, BUSD.
Description: Issuance and management are carried out by specific organizations. Advantages include high liquidity and accessibility, while disadvantages include lack of transparency regarding collateral and the possibility of blocking addresses. - Decentralized Collateralized:
Example: Dai (DAI), Magic Internet Money (MIM).
Description: The price is supported by significant cryptocurrencies placed in smart contracts. The main advantage is decentralization. - Decentralized Algorithmic:
Example: Frax (FRAX), TerraUSD (UST) before its collapse.
Description: Uses algorithms to regulate the price. Collateral is one cryptocurrency asset. The advantage is decentralization; the disadvantage is lack of collateralization with highly liquid assets.
Stablecoins represent a unique instrument in the world of cryptocurrencies, offering a balance between stability and innovation. Despite their advantages, investors should consider the risks and choose appropriate types of stablecoins based on their goals and strategies.
Most Popular Stablecoins
Tether (USDT)
Tether (USDT) is the most popular and largest stablecoin by market capitalization, with a capitalization of $83.2 billion as of June 23, according to CoinMarketCap. The daily trading volume of USDT exceeds Bitcoin’s trading volume by 30%. USDT is available in TRC-20 (Tron) and ERC-20 (Ethereum) standards.
While it has its drawbacks, such as transparency issues regarding reserves, it is still frequently chosen due to its high liquidity and ease of exchange for other cryptocurrencies and fiat money. You can store USDT in any popular wallet, such as Trust Wallet or MetaMask, and use it for quick and convenient transactions.
USD Coin (USDC)
In second place in popularity is USD Coin (USDC), with a capitalization of $28.5 billion. Together with USDT, these stablecoins make up almost two-thirds of the stablecoin market, functioning as an analogue of the dollar on cryptocurrency exchanges.
Launched by Circle and backed by Coinbase, USDC is one of the best stablecoins due to its high level of security and transparency. Its reserve backing is fully aligned 1:1 with US dollars, confirmed by regular audits. This generally makes it safer for storing money on cryptocurrency platforms.
Other Popular Stablecoins
The top five also includes:
- Dai (DAI): $4.7 billion
- Binance USD (BUSD): $4.3 billion
- TrueUSD (TUSD): $3.1 billion
Additional popular stablecoins include Pax Dollar (USDP), USDD, Gemini Dollar (GUSD), Frax (FRAX), and USDJ. These tokens are often used for payments and stored as reserves.
If you need to buy a stablecoin for long-term fund storage or for transactions, DAI can be an excellent choice. This decentralized stablecoin is pegged to ETH and does not depend on central authorities or banks, making it less susceptible to regulatory risks. The MakerDAO platform, on which it is launched, provides a high level of security and transparency through smart contracts, constantly maintaining demand for DAI in the crypto ecosystem.
This confirms the stability and demand for stablecoins, making them an important tool in the cryptocurrency market.
If you want to start working with stablecoins, it will be helpful to familiarize yourself with the support and security policies of the chosen platform. Examples of such platforms include Coinbase and Binance, which offer applications with high security for storing and exchanging stablecoins. It is essential to remember that after registering on the site and completing the KYC (Know Your Customer) process, you will be able to access all the useful features of these platforms to manage your cryptocurrency assets.
Regardless of the amount of money you want to invest or exchange for stablecoins, always consider the pros and cons of each option. Conduct a technical audit of the project and ensure its security and reliability. This way, you can make informed conclusions and choose the best stablecoin for your needs, whether for trading operations, fund storage, or converting fiat back to cryptocurrency.
Advantages and Disadvantages of Stablecoins
Stablecoins have numerous advantages but also some disadvantages.
Advantages
- Unlimited Issuance Volume: The issuing organization can create any number of stablecoins backed by corresponding assets. This distinguishes stablecoins from traditional cryptocurrencies, which usually have a limited and predetermined supply.
- Price Stability: Stablecoins are less susceptible to speculative manipulation than other cryptocurrencies. Their price fluctuates within the value of the underlying asset, making them less vulnerable to schemes like Pump & Dump.
- Investment Opportunities: Stablecoins allow investors to diversify their portfolios by investing in tokens linked to various underlying assets.
Disadvantages
- Manipulation Risk: Stablecoins are issued and supported by a specific company, which could potentially lead to manipulation and fraud by the issuer.
- Low Volatility: Although low volatility can be an advantage, it also limits the opportunities for generating high returns in a short period. However, this stability helps preserve investors’ funds.
Applications of Stablecoins
Stablecoins are utilized in various financial operations due to their stability and reliability.
- International Transfers: Stablecoins facilitate quick and inexpensive cross-border transactions, making them ideal for international money transfers.
- Regular Payments: Due to their stable value, stablecoins are suitable for regular payments, such as salaries or rent.
- Long-term Savings: In countries with currency restrictions, stablecoins provide the opportunity to invest in stable foreign currencies like the US dollar, helping to protect against local currency inflation.
- Tools for Traders and Investors: Stablecoins are popular among active traders and investors involved in trading or OTC transactions due to their predictability and low volatility.
Advantages of Stablecoins for Investors
- Hedging Positions: During periods of high volatility in the cryptocurrency market, investors can convert their assets into stablecoins to preserve their value. “For example, during increased market volatility, to protect savings in traditional cryptocurrencies, many convert them into ‘stable coins,’” notes Nikita Vassev, co-founder of the 0xprocessing system.
- Building Low-Risk Portfolios: Stablecoins are used to create crypto portfolios with minimal risks.
- Staking: Some cryptocurrency funds accept stablecoins for staking, allowing investors to earn additional income.
- Accessibility on Exchanges: Stablecoins can be easily purchased on cryptocurrency exchanges, making them accessible to a broad range of investors.
Risks Associated with Using Stablecoins
Despite numerous advantages, stablecoins are not without risks.
- Lack of Confidence in Issuers: The main issue lies in the lack of trust in stablecoin issuers. If the issuer fails to back the token with corresponding assets, the stablecoin’s value may drop.
- Regulatory Risks: Stablecoins may face regulatory issues. For example, the US Securities and Exchange Commission (SEC) viewed the Binance stablecoin as a potential security. As a result, under regulatory pressure, the Paxos company halted the issuance of this token.
Conclusion
Choosing a stablecoin in 2024 requires careful analysis and a deep understanding of your financial goals and needs. In the rapidly changing cryptocurrency landscape, key factors for selection include the issuer’s reliability, the degree of token backing, liquidity, and compliance with regulatory requirements.
If you’re looking for a stablecoin with high liquidity and widespread acceptance, consider USDT (Tether) or USDC (USD Coin). These tokens have proven themselves as reliable tools for everyday transactions and trading. If your focus is on long-term investments and risk minimization, DAI (Decentralized Autonomous Organization) could be an excellent choice due to its decentralized nature and transparent backing system.
Don’t forget to consider regulatory aspects, as they can significantly impact the stability and availability of stablecoins. Stay vigilant about new regulatory initiatives and changes in legislation to minimize potential risks.
Ultimately, the choice of a stablecoin should be based on thorough research, verification of backing, and evaluation of the issuer’s reliability. By considering these factors, you can make an informed choice that will provide you with financial stability and convenience in working with cryptocurrencies in 2024 and beyond.
