The cryptocurrency market has lately been undergoing topsy turvy, which has thrown a wave of challenges and doubts about its stability. Amidst high market volatility, stablecoins offer investors a fresh lease of hope. They are pegged to an asset like the US dollar, gold or similar items, which help to maintain a fixed value over time. As the name suggests, this category of digital currency remains stable despite considerable changes in the financial market.
Well, the sudden drop in Tether’s price shook the crypto world and raised questions on the stability of stablecoins. However, the incident could not degrade these cryptocurrencies’ market value because they have the potential to emerge as a competitor to fiat.
How different are stablecoins from other cryptocurrencies?
The principal factor that differentiates stablecoins from any other crypto is their potential to be used in actual transactions because of their stability. Currencies like Ethereum or Bitcoin easily fall prey to uncanny market situations, which sometimes makes them a risky asset in a financial transaction scenario. The best part of using stablecoins is that they act as available capital. You can easily convert crypto, like bitcoin, into stablecoins. Furthermore, accessibility is attached to these coins even more than fiat.
Many businesses or individuals use stablecoins for smart contracts, which indicate their real-life value. If the notoriously volatile crypto market has recently caused distress, you can try your luck in stablecoins.
What are the four types of stablecoins?
Stablecoins belong to four broader categories, each offering a unique function which further undermines its value as a potential currency. Let’s explore them.
- Algorithmic stablecoins
This category of coins holds a special place in the crypto world for its complex yet rare features. Unlike other forms of stablecoins, they depend on smart contracts, which use algorithms for adjusting their supply. With its automated stabilization measures, these coins maintain stability in changing market situation. Example; Frax, DAI, Empty set Dollar etc.
- Fiat-based stablecoins
Fiat-backed coins are pegged to a fiat currency like US Dollar making them less volatile than general digital assets. The value of stablecoins is linked to fiat in a 1:1 ratio; for instance, one Tether always equals $1. The market situation might fluctuate the value a bit. Example; USDT, Binance USD, EUROS etc.
- Commodity-backed stablecoins
When a tangible asset like gold or any costly metal is pegged to crypto, it becomes a commodity-backed stablecoin. Its value is decided based on the predetermined unit of the commodity it is pegged to—for example, DAI, DGX etc. If you intend to convert crypto into liquid money, then this category of stablecoins can serve your purpose.
- Crypto-based stablecoins
Similar to fiat-backed stablecoins, crypto stablecoins are pegged to another digital currency. They are entirely decentralized coins because anyone can create them through smart contracts without involving any central entity—for example, Wrapped Bitcoin.
Top 3 stablecoins with high potential
Stablecoins catches investors’ attention for being a currency that is less volatile compared to general cryptocurrency. Those wishing to move ahead into a path of safe crypto investment can look for the following stablecoins, which have good potential in the future.
- Binance USD (BUSD)
Per market cap, BUSD ranks among the third largest stablecoin leaving behind USDT. The currency was created to enhance the US dollar’s stability with blockchain. It is issued by the Binance exchange and regulated by the New York State Department of Financial Services (NYDFS).
- Pax Dollar (USDP)
Paxos, a reputable financial institution, created Pax dollar to intermingle the stability of fiat and the usefulness of digital currency. This token enables the user to redeem or exchange it for US Dollars. It’s a smart contract which runs on the Ethereum blockchain.
- Digix Gold Token (DGX)
Digix falls under commodity-backed stablecoins as it is backed by gold. A DigixDAO creates the token to provide infrastructure to make crypto that is supported by any asset. Verification happens through the proof of provenance protocol built on the Ethereum blockchain.
Are stablecoins worth an investment?
Investment decisions in any physical or digital asset require adequate knowledge of the market situation and other related factors. So, if you plan to invest your hard-earned money on stablecoins, consider the pros and cons below before making any decision.
- Stablecoins enable businesses or traders to efficiently carry out cross-border transactions, which is the biggest challenge with fiat.
- As they are pegged to a physical asset, the chances of volatility are negligible.
- Liquidity is guaranteed with stablecoins which is a bit challenging in other digital currencies.
- Compared to fiat, they help investors earn a higher profit because of their stability.
- Limited transparency with the amount of reserve a coin holds.
- Stablecoins might come under the scanner of instability in case of any unregulated crypto projects.
- The coin’s accountability turns risky with limited external audits.
Stablecoins provide some stability that cryptocurrencies lack, but those who own stablecoins should consider the risks. While most of the time, investors will see stablecoins having limited or no risk, it’s in a crisis that these coins can become riskiest to own.