Bitcoin, Ethereum and other cryptocurrency have revolutionized the way people invest. However, investors need to be aware that many of these coins are subject to dramatic price fluctuations, which can cause them to lose money. Stablecoins are gaining popularity to counter the volatility in the cryptocurrency markets. While cryptocurrencies can be volatile by nature, they also offer great reward. If you’ve ever tried online sites that offer casino bonuses, such as comparison platforms like oddschecker, then you know what we’re talking about.
No matter how much research you do, it’s almost impossible to predict the outcome. You can mitigate the risk of investing cryptocurrency by adding stablecoins in your portfolio.
What are stablecoins?
Stablecoins can be described as a digital currency that is tied to stable assets like the US dollar or gold. Fiat-backed (government-backed), cryptocurrency-backed, and commodity-backed are the most common types of stablecoins available. Often pegged to a fiat currency, they’re designed to maintain their value.
Cryptocurrencies’ dramatic price fluctuations make them difficult for everyday people to use because it’s almost impossible to know how much they’ll be worth from one moment to the next. Fiat money, such as the US Dollar or precious metals like gold, have stable prices. While the dollar’s value may change over time, it doesn’t experience the volatility of cryptocurrencies.
Stablecoins are stable because they can be pegged to fiat currencies. The stablecoin’s company creates a reserve in order to store the assets backing it. This could be, for example: placing $5 million in a Bank to back up $5,000,000 worth of a stablecoin.
That’s the process for pegging stablecoins to real-world assets. The fiat money is taken from the reserve when a stablecoin investor wants to cash out their investment. The most popular stablecoins are fiat-backed, but the process is the same for cryptocurrency and commodity-backed.
What are the most popular stablecoins?
These are the top stablecoins in terms of market cap and volume.
- Tether: Tether is the fifth-largest digital coin worldwide based on market value. It has been around since 2014. Tether coins usually have a value of one dollar, but the price may change from time to time.
- USD Coin: A digital currency that is tied to the US dollar, USD Coin was launched in 2015 by Circle and Coinbase cryptocurrency exchanges. A consortium of companies called “Centre” back the coin.
- Binance: Binance coin was created in 2017 to pay discounted trading fees on Binance’s platform. Today it’s used on various platforms to make payments for entertainment, book travel accommodation, and pay for online services.
- DAI: MakerDAO, another stablecoin that is tied to the US dollar regulates its value to ensure its price stability. In 2017 it was launched using an automated smart contracts system on Ethereum blockchain to keep its value as close the US dollar.
- UST: The newest currency on our list, UST was launched in September 2020. The US dollar is also pegged to the yield-bearing, scalable currency.
Why should you invest in Stablecoins
One of the biggest reasons for investing in stablecoins is that they don’t undergo the price fluctuations experienced by crypto coins that aren’t pegged to fiat currency or another asset. They’re an excellent option if you’re considering investing in a volatile coin such as Bitcoin.
If you see significant movements in cryptocurrencies, such as Ethereum or Bitcoin, you can quickly transfer your money into stablecoins and wait for the market stabilize. You can keep buying stablecoins with fiat money, knowing the value won’t change unless you move it to a Bitcoin or another cryptocurrency.
You can also use stablecoins on cryptocurrency exchanges. Stablecoins are easy to trade for other cryptocurrencies and fiat money because of their liquidity. It can be difficult to trade cryptocurrencies in cash. Sometimes, it takes days to close a sale order. Stablecoins can solve this problem. All you have to do is convert the cryptocurrency you want to sell to a stablecoin, and it’ll maintain its value.
Stablecoins are low risk and can be a good choice for diversifying your portfolio. Although they’re designed to maintain their value, they may appreciate it over time. This is especially true for commodity-backed or cryptocurrency-backed stablecoins.
Stablecoins can make you money
Although it may seem counterintuitive to say, you can make money by investing in stablecoins. These include lending stablecoins or earning interest on stable coins.
Crypto lending is the lending of fiat money or stablecoins to others in return for interest payments. You can earn between 5 and 12 percent in return for lending stablecoins. If you lend Tether, you’ll be paid back in Tether plus interest.
Earn Interest on Stablecoins
Opening a crypto exchange account and earning interest is another way to earn interest in stablecoins. It’s much the same as opening a money market account at your bank. If you invest in a stablecoin that is backed by gold, silver, or other precious metals, then the value of your stablecoins can also go up. Since fiat money is meant to hold its value, you won’t see stablecoins pegged to fiat currency increase in value.
What are the risks of investing in Stablecoins
While stablecoins are generally much safer than other cryptocurrencies, they’re not without risk. Although there are ways to make money with stablecoins, their prices don’t usually increase significantly. Thus, you may miss out on profits you could have made if you’d invested in more volatile, high-risk, high-reward coins.
Bitcoin is a great example. If you’d invested $1,000 in Bitcoin five years ago, you’d have over $50,000 today. Tether’s $1000 investment would be worth around $1000 today. While stablecoins tend to hold their value, there’s always a risk the asset it’s linked to will decrease in value. If this happens, your stable coins’ value will also fall.
Finally, you need to confirm whether the stablecoin’s central authority has collateral claims. If it doesn’t, they may not have the money to pay you your money. Many central authorities don’t share information about their reserves. Tether is just one example. It claimed that each coin was insured by one US dollar. When the New York Attorney General investigated, Tether had to admit this wasn’t true.
What should I do if I want to invest in Stablecoins
If you are looking to diversify your cryptocurrency investments, stablecoins could be a good investment. You can use them to move money easily when there’s a lot of volatility in the cryptocurrency market. They can also make an excellent investment, although you won’t make as much money as you would with riskier investments. In the end, it’s all about balance. Stablecoins can be a great way to balance your portfolio.
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