The cryptocurrency market is a roller coaster ride with ups and downs and highs and lows; bitcoin might be touching the skies today but it may hit the ground tomorrow. And this sheer uncertainty in the cryptocurrency realm doesn’t let investors rely their trust upon it.
Now imagine owning a cryptocurrency that is safe, low cost and asset backed. Yes asset backed, looks unreal right but it's possible with stablecoins. Yes it's an all new term that is climbing the crypto popularity ladder. You might want to learn more about the asset backed cryptocurrencies so without further delay let’s dive in.
(Related Reading: 8 Most Stable Cryptocurrency in 2022)
What is a Stablecoin?
As the self explanatory term goes; stablecoins are cryptocurrencies that stay steady and firm. These cryptocurrencies are less volatile and hence safe. Stablecoins are pegged to real assets like gold, precious metals, US dollars, and other fiat currencies.
A stablecoin can also be pegged to the real estate i.e. you can purchase a whole stablecoin reserve by backing up your restaurant, or your villa. Pegging cryptocurrency to a real world asset is a way to control extreme fluctuations in the price. Stablecoins are long term investments stablecoin holders can expect a fixed return on them.
(Related Reading: Introductory Guide to Decentralized Finance (DeFi))
The reserve backed stablecoins provide price stability, and safety. Stablecoins were introduced to control the price swings in the cryptocurrency realm. Bitcoin, Dogecoin, Ethereum, Litecoin might be investor’s favourite but these cryptocurrencies are subject to extreme fluctuations.
Stablecoins can be used for holding, trading, borrowing, lending and making payments abroad. They offer the most convenient way of sending money abroad. Stablecoins are bridging the gap between fiat currencies and cryptocurrencies as they are backed by real assets people are relying more trust on them.
(Must Check: Digital Currency and Cryptocurrency: Types and Benefits)
The asset backed stablecoins are gaining popularity in the decentralized world; it seeks to give tough competition to fiat currencies. At present Tether USDT has a circulating supply of 73,809,061,439 USDT.
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Tether, True (USD), Paxos Standard and USD coin (USDC) are some prominent examples of stablecoins. Stablecoins are less prone to extreme changes in the price. Investing in stablecoins means having a safe way to invest. If you are looking for a safe way to invest, stablecoins can be your best bet.
Advantages of Stablecoins
Stablecoins are less volatile compared to other cryptocurrencies.
Stablecoins are safe to invest; as they are backed by fixed assets the stablecoin.
Stablecoins facilitate international payments; making payments abroad has never been easier.
What provides stability to stablecoins
You may know that printing currency requires keeping a fixed amount of collateral aside; the collateral can be gold, government securities and foreign country assets. This ensures that the money in circulation never exceeds the money in demand. To curb down the risks of inflation the government only prints a fixed amount of money that is usually backed by collateral.
This same process is followed by the developer of “stablecoins”, usually the developer of a respective stablecoin sets aside a fixed amount of gold, or US dollars, or other cryptocurrencies before minting stablecoins. This ensures that the demand for stablecoins never exceeds its supply.
The collateral (in the form of fixed assets and US dollars) backing provides a rock solid foundation to the stablecoins. It also ensures that stablecoins are subject to less fluctuations and are less volatile than other cryptocurrencies. Hence the fixed assets provide stability to the stablecoins.
Some stablecoins are backed by US dollars, while others are backed by gold. Let's learn about the different types of stablecoins in more detail.
4 Different types of Stablecoins
Following are the different types of stablecoins:-
(Please note 101 Blockchains is used as a reference for this section)
Commodity backed Stablecoins:- Commodity backed stablecoins are one of the most popular stablecoins. This type of stablecoins are backed by precious commodities like gold, platinum and real estate. Gold backed stablecoins are most popular, as gold’s value tend to appreciate over a specific period of time. This type of stablecoins also offer higher returns . Digix DAO, Gold Mint, Ekon Gold are some examples of gold backed stablecoins.
Gold backed stablecoins follow a 1:1 ratio i.e. one gold backed stablecoin will be pegged to 1 gram of gold. Stablecoin holders can redeem their specific commodity (gold, precious metals, property) whenever they desire.
Fiat Collateralized Stablecoins:- Fiat backed stablecoins are backed by fiat currencies. Fiat currencies refer to the real world currencies i.e. US dollars, Euro, British Pound, Canadian dollar. These type of stablecoins have a 1:1 ratio backing it means 1 stablecoin will be equivalent to 1 unit British pound or 1 unit US dollar.
For every fiat backed cryptocurrency, there is a real cash reserve i.e. if an investor wants to invest 10 million in USDP (US dollar backed stablecoin), the USDP developers have to ensure that 10 million USD dollars are deposited in the bank prior to stablecoin minting. Paxos Standard (PAX), Gemini Dollar (GUSD), True USD, USDP are some examples of fiat backed stablecoins.
Algorithmic Stablecoins:- This type of stablecoins are not backed by any commodity or fiat currency. Algorithmic stablecoins are based on algorithms. This type of stablecoins involve adjustments in the algorithm for controlling the demand and supply of stablecoins. In case the stablecoin’s price increases the algorithm will adjust itself to issue more coins; and when the stablecoins price decreases the algorithm will adjust itself to sell off the coins.
Ampleforth (AMPL), DeFi dollar (USDC) and Frax are some examples of algorithmic stablecoins. Algorithmic stablecoins react according to the market events.
Cryptocurrency backed stablecoins:- This class of stablecoins are backed by other cryptocurrencies. This means for minting $100 of crypto backed stablecoin; $50 bitcoins will be kept as reserve. Cryptocurrency backed stablecoins are more volatile compared to other types of stablecoins. They encounter wild highs and lows in terms of interest rates. Wrapped Bitcoin (WBTC) is an example of cryptocurrency backed stablecoin.
By this time you would have understood the different types of stablecoin. Let's take this learning journey further to learn more about some popular examples of stablecoins.
3 Examples of Stablecoins
Tether USDT, True USDT and USD are some common examples of stablecoins; at present Tether is the most popular stablecoin.
Tether:- Tether is the most popular type of stablecoin that has recently caught the attention of many investors. Tether is a cryptocurrency issued by Bitfinex. Tether is backed by US dollars. It means cash reserves, securities, treasury bills of a specific amount will be set aside as collateral for minting collateral.
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The tether ratio for minting is 1:1 i.e. 1 tether coin is equivalent to 1 USD dollar. The circulating supply of Tether is 73.81 billion US dollars. With a market capitalization of $73,796,981,509 USD, according to coinmarketcap Tether is the fifth most popular cryptocurrency.
Digix Gold (DGX) :- Digix Gold (DGX) is a stablecoin that is backed by gold. The Digix Gold coin is a commodity based stablecoin; that is built by the Singapore based company.
According to coinmarketcap the market capitalization of Digix Gold (DGX) is $3,905,265 USD. The circulating supply of Digix Gold is 74,634 DGX coins. The best part about DGX gold is that it can be exchanged for physical gold later. DGX is not available in the cryptocurrency markets of the USA.
True USD:- True USD is another popular stablecoin that is attracting the investment enthusiast; True USD is a fiat collateralized stablecoin. It is pegged to the US dollars and has a ratio of 1:1.
According to coinmarketcap True USD has a circulating supply of 1,247,675,427 TUSD and market capitalization of $1,248,612,131 USD. The US dollar backed stablecoin is ranked 38 in popularity. True USD follows the Tether protocol; and currently has $400 million backed tokens.
There are several other examples of stablecoins like Dai, Ampleforth, and Paxos Standard.
How to Invest in Stablecoins?
Stablecoin investing is recently becoming popular as a safe means of investing in cryptocurrencies. An investor can earn interest via stablecoin by lending and staking. Lending stablecoin means providing stablecoin as a loan to other investors; while staking stablecoin means putting the stablecoin on stake in the proof of stake procedure for winning rewards.
To earn interest on stablecoins; a user is first required to open a demat account; post opening the demat account the user is required to choose an application that supports cryptocurrency trading Coin DCX, Binance, Digifinex are some applications where stablecoins can be purchased from.
After selecting the application, the user will be required to deposit a specific amount in the account. Any means of payment is accepted on the cryptocurrency platform. Further the deposited amount will be transferred to the user’s cryptocurrency wallet.
Once the money gets deposited in the cryptocurrency wallet the user is free to buy stablecoin of their choice.
While playing the investment game the crux is either to lose it all; or to play safe.
The investors that are looking for long term investing look for investments that are safe and provide sound returns. (Must Check: What is the Future of Cryptocurrency?) Stablecoins can be an addition to the investment portfolio. Just like mutual funds and fixed deposits, stablecoins are a safe way to long term investing.