What Are Stablecoins? A Brief Guide

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What Are Stablecoins? A Brief Guide

Among the characteristics of cryptocurrencies that make them what they are, volatility is one of the most famous (and, ironically, the most infamous). On the one hand, the fact that crypto can radically increase in price literally in a day gives coin owners a chance to make an instant profit. Meanwhile, the probability that the value of crypto will drop overnight is never off the table, so keeping all your savings in popular cryptocurrencies may not be the wisest decision.

However, there are specific cryptocurrencies that manage to maintain the increased stability that’s usually inherent in fiat. These are known as stablecoins.

What are stablecoins, and what are their advantages? Let’s find out.

Stablecoins Explained

Stablecoins are cryptocurrencies whose value is tied to reserve assets, usually fiat. It is the only type of crypto that has intrinsic value. Naturally, unlike other cryptocurrencies, the price of which is determined by the laws of supply and demand, stablecoins have increased stability because, in most cases, their value changes only in parallel with that of the fiat assets to which they are pegged.

One might rightly wonder: if this type of asset lacks the volatility (and, as a result, earning potential) of other cryptocurrencies, then what are stablecoins used for? Because of their resistance to volatility, stablecoins are highly appreciated as a means of digital payment and keeping one’s savings. In fact, they combine the best of both worlds: the stability of fiat currencies and the convenience of storage, transfers, and conversions typical of crypto.

For instance, such stablecoins as USDT, USDC, and BUSD successfully fulfill the role of digital dollars, duplicating the price of this fiat currency as closely as possible and replacing USD in digital financial operations. At the same time, they significantly facilitate daily commercial transactions and financial transfers because, unlike fiat, you do not need a bank account to store stablecoins, and handling them is generally less burdened with bureaucratic procedures than the conduct of bank operations.

Benefits of Stablecoins

Today, stablecoins are some of the most popular cryptocurrencies because, unlike other types of crypto, they are widely used not only for investing but also for everyday purposes, such as paying for goods and services and keeping savings. Apart from this general aspect arising from the very nature of stablecoins, they also have other undeniable benefits that increase their appeal among crypto holders. They are as follows:

  • Stablecoins are widely available and freely circulated. Individuals can buy, sell, and exchange them in any country where crypto is legal without using the services of banks and other financial institutions.
  • Transactions with stablecoins are often cheaper than those with conventional fiat. Stablecoins circulate based on the rules and tariffs of crypto exchanges. The fees for transferring these tokens in large volumes are often much lower than typical bank commissions.
  • Stablecoins are convenient to use. In many countries, to make a bank transfer in US dollars, a person must go to a bank, fill out numerous applications, and wait for the operation to be carried out. At the same time, you can transfer stablecoins from one wallet to another in a matter of minutes with just a few clicks.
  • Stablecoins blur the distinction between domestic and international transfers. It doesn’t matter if you transfer tokens to a person in the next house or to a wallet whose holder lives on the opposite side of the planet. The procedure is always the same.

Shortcomings of Stablecoins

Undoubtedly, like any other innovative payment method, stablecoins have not only pros but cons as well. Here are the key ones:

  • Stablecoins are less suitable for investment than other cryptocurrencies. Reduced volatility makes USDT, USDC, and other tokens of this type a great tool for storing savings and making payments. However, unlike Bitcoin, Ethereum, and other major cryptocurrencies, stablecoins cannot increase their price dramatically in a matter of days.
  • Stablecoins are more centralized than other cryptocurrencies. For a token to be considered a stablecoin, it must have intrinsic value backed by “hard assets.” As a result, unlike many other cryptocurrencies that are created and distributed by enthusiasts based on grassroots principles, stablecoins are usually issued by large companies, which does not fully correspond to the principles of decentralization and deregulation, so valued in the crypto community.
  • Stablecoins require regular audits to retain their value. The low volatility of these tokens is supported by material resources. Consequently, companies must ensure transparency by conducting regular audits and publishing reports confirming that they have sufficient resources to maintain the value of their issued coins.

As we can see, stablecoins have their cons. However, these weaknesses are not critical, and if the companies follow the necessary rules, tokens issued by them remain reliable and noteworthy financial instruments.

Bottom Line

Stablecoins are undoubtedly worth the attention of everyone who is interested in cryptocurrencies. This type of token combines the best features of crypto and fiat, while being easy to use and low in volatility. Although stablecoins are not the best choice for investors who want to profit from the sharp fluctuations in cryptocurrency rates, they are great for those looking for new ways to keep their savings and make online payments. Convenient, innovative, and independent of banking bureaucracy, stablecoins have every chance to become one of tomorrow’s best payment means.

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