What is a Stablecoin and Why is it Important?
Cryptocurrency is a digital currency that is decentralized and not controlled by any central authority. The value of cryptocurrencies can fluctuate wildly, which has led to the creation of stablecoins. The best stable coins are pegged to a more stable currency, such as the U.S. dollar or the euro, and are designed to have less crypto volatility than traditional cryptocurrencies. In this tutorial, I will guide you through the maze of stablecoin buzz.
A stablecoin is a cryptocurrency that has low volatility and maintains a relative value to a more stable currency like the US Dollar or Euro. One of the reasons why they are so important is because they help protect investors from extreme price swings in traditional cryptocurrencies like Bitcoin and Ethereum.
There are two primary reasons why stablecoins were created.
- Provide a stable cryptocurrency investment vehicle as free as possible from the effects of inflation etc.
- Facilitate faster easier exchange than is possible using Fiat currency.
As the name suggests, a stablecoin typically has a more predictable price value than other cryptocurrencies. Predominantly, they are designed to maintain an approximate 1 percent price fluctuation. If for example, the dollar’s price fluctuates by 10 percent during a 30-minute trading window, a stablecoin typically will only fluctuate by .1 of the dollar.
There are several ways that stablecoins can be secured. One way is to have a central bank that holds the currency in reserve. Another way is to have a large enough supply of tokens that there is low price volatility. These Central Bank-like backing systems keep the coin from devaluing as quickly over time.
The three most popular types of stablecoins in circulation today include:
- fiat-pegged cryptocurrencies
- cryptocurrency-backed assets
More on the Different Types of Stablecoins?
There are primarily two types of stablecoins: fiat-backed and gold-backed. Fiat-backed stablecoins are backed by the currency of a government or Central Bank, such as the USD or EUR. Conversely, as the name suggests, gold-backed stablecoins are backed by gold. A cryptocurrency backed by assets is also a type of fiat-backed stablecoin but it may not be tied to any particular currency. Cryptocurrency backed by assets can be used as collateral in order to create stability in the market while fiat-backed coins can be used for transactions because they are not volatile like Bitcoin or other cryptocurrencies. Some fiat-backed stablecoins are USDT, Gemini Dollar, and Tether. Some examples of Gold-backed coins are the PGMT (Perth Mint Gold Token), Metal coin, and Digix Gold Token (DGX).
A fiat-pegged cryptocurrency is a cryptocurrency that is pegged to the value of a fiat currency such as USD, EUR, or GBP. The USDT token was launched in September 2017 and recently rebranded as USDC. USDT stands out as a pioneer in the best stable coin rush! The backing for this stablecoin comes from Tether, a company that prints an asset-backed token to back each USDT unit it creates and issues these units via an open market mechanism. These tokens are created when Tether receives an order to create a new unit of USDT, and in exchange for creating the token, it must pay a fee. The USDC is now the 2nd largest cryptocurrency based on market capitalization, under Bitcoin. As of the time of this publication, USDC has a market cap of over $73 Billion!
Gold Pegged Cryptocurrency
A gold-pegged cryptocurrency is a cryptocurrency that is pegged to the value of gold. The idea behind this is the same as for any other type of cryptocurrency, but with a currency that’s based on gold.
Gold is the standard bearer for all currency values. While governments and central banks have primarily abandoned what is known as the Gold standard, gold still provides the foundation stability of all currency exchanges.
Stablecoin – USDT
The most well-known stable coin today is USDT which has a market cap of $73 billion. The token is backed by USD and it can be easily converted into cash if and when needed. Rather than relying on complex mathematical formulas to create value, a stable coin leans on a secondary asset that provides a value base. As such, they have a relatively fixed price that remains steady in the face of changing demand so it is easy to understand the value of the coin.
Where can I to buy USDT and is it secure?
The first step is to find a reliable exchange that Offers USDT. My top recommendation is Coinbase. You can find more info on Coinbase here. After deciding on your exchange, you must create an account by providing your personal information. A bank account is needed to set up your account With Coinbase you can purchase USDT with a credit card or wire transfer. After verifying your identity, an order can be placed for the desired amount of USDT.
DAI is a cryptocurrency that has a stable value. It is also pegged to the US dollar. Dai is created by the Dai Stablecoin System which has two tokens: Dai and Maker (MKR).
Dai is created by collateralized debt positions (CDPs) whereas MKR tokens are used to generate and maintain the stability of the system. A CDP is a financial instrument involving the simultaneous purchase and sale of assets, often with an underlying asset as collateral for the debt. The assets used in a CDP are typically debts in their own right. In particular, they often involve mortgage-backed securities. A credit default swap is an example of a derivative related to this type of instrument.
The price of Dai changes according to market conditions. The stable value of Dai is maintained by MKR token holders who can buy or sell their tokens on open exchanges, which would increase or decrease supply accordingly. The MKR token is used to govern the Dai platform. For example, when the supply of Dai increases, the MKR token holders will receive extra coins in their wallets. When the demand for Dai decreases, MKR holders can exchange their tokens on exchanges, which would decrease supply and create a shortage of Dai.
Gold Backed PGMT (Perth Mint Gold Token)
Perth Mint Gold Token (PGMT) is a new gold-backed stablecoin, which is backed by physical gold stored in the Perth Mint. This means that there is a 1:1 correspondence between PGMT and the underlying asset. One PGMT token equals 1 gram of gold. The Perth Mint Gold Token (PMGT) is a token that has been designed to make it as simple as possible for investors to buy, store, and trade gold. With the help of blockchain technology, PMGT offers a new way of investing in gold.
The Perth Mint Gold Token is an ERC-20 token, which means that it can be stored in any Ethereum wallet that supports these tokens. It has been designed to be as simple as possible for investors to buy. Perth Mint Gold Tokens can be bought using Bitcoin (BTC), Ether (ETH), or Australian dollars (AUD). These tokens are then converted into Australian dollars to acquire physical gold. The Perth Mint Gold Token is the world’s first official gold-backed cryptocurrency. Perth has a unique recycling model that ensures investors can receive their investment back through physical gold coins.”
PGMT has been designed to provide a reliable store of value, with less volatility than other cryptocurrencies. Additionally, their goal is to not be tied to any single government or jurisdiction.
Goldman Sachs has developed a similar stablecoin as a part of a project called SETLcoin. It is backed by US dollars, Swiss Francs, and euros in equal proportions to provide liquidity and stability.
How to Choose Which Stablecoin Fits Your Needs?
There are several factors to consider when choosing which stablecoin is best for your needs.
The first factor to consider is the stability of the coin. After all, we are looking at stablecoins because we want stability! Right? So, it stands to reason that we first look at how stable is the anchor asset. Does it have a high market cap? Is it backed by a reserve? What is the company’s track record? A coin with a lower market cap might be more volatile but will likely go up in value faster. These are all things that we should consider when evaluating a coin’s stability.
Long Term Investment or Leverage
The second factor to consider is whether you want to use it for trading or a long-term investment. If you’re trading, then you want a stablecoin that will maintain its value and not fluctuate too much. If you plan on holding your coins for an extended period, then you may want to pick one with lower volatility and higher liquidity.
Beyond that you may be just looking for a stable coin to hold your capital. That way when that new crypto project emerges you can be among the first to get it when it comes off the mint! More crypto millionaires have been made in the first hours of a coins minting than at any other time.
What is the market cap mean in the cryptocurrency stablecoin market?
The market cap of a cryptocurrency is the total value of the coins, or currency, in circulation. This number is calculated by multiplying the current price per coin by the total number of coins that are currently in circulation. The inflation rate of a cryptocurrency is the percentage change in the price of one unit of a currency compared to another unit over a given period.
Are Stablecoins Secure?
The Security of a Stablecoin can be evaluated on four main parameters:
- The degree to which they are pegged to the value of a fiat money or other asset
- The degree of volatility that exists in the underlying asset or currency,
- How decentralized they are
- Their liquidity
The degree to which stablecoins are pegged is one of the main parameters for evaluating them. Yet we must evaluate the company or government that minted and regulates them.
The Exchange that Minted and Regulates the Coin
It should be noted here that all stablecoins are not created equal. The recent FTX scandal has taught many investors a hard lesson. It would be prudent for you to verify not only the advertised peg your coin is associated with but the veracity of the exchange that has control of it. At the moment, the most reputable stablecoins that we invest in are USDC or USDT. Other options include TUSD and PAX. As always, we are not here to provide investment advice, Our goal is simply to equip you with information! Please seek assistance from an investment professional!
Start Using a StableCoin Today to Protect Yourself from Volatility
Cryptocurrency is a hot topic these days. With the recent volatility of Bitcoin, Ethereum, and other popular cryptocurrencies, many people are looking to diversify their crypto investments. One of the best ways to protect yourself from volatility is to use stablecoins.
In this article, we’ve covered a few of these stablecoins and why they might be right for you. Let us know in the comments below which stablecoin is your favorite!
Let’s have fun investing together!