Cryptocurrencies are extremely volatile. Ofat , these digital tokens do not behave the same way as conventional financial instruments like stocks and bonds, but their volatility is one of the reasons they remain attractive to crypto investors. Yes you could when – or you could become a millionaire overnight.
There is, however, a subset of cryptocurrencies designed to remain stable, to provide value that does not fluctuate. They are called stablecoins and play an important role in the cryptocurrency markets.
A number of stablecoins – particularly terraUSD and tether – have already made headlines for their respective failures to provide stability. Earthand tether, the largest and most popular stablecoin, is showing signs of frailty.
Stablecoins have become a central part of the crypto ecosystem, performing important functions for investors and speculators. Below, we’ll look at what makes a stablecoin — in theory, anyway — how they’re different from other cryptocurrencies and how people use them today.
Are stablecoins cryptocurrencies?
A stablecoin is a cryptocurrency with a twist. Instead of being “mined” by an open, distributed network of computers performing a combination of math and record keeping, a stablecoin derives its price from the value of another asset. In short, a stablecoin is pegged to another underlying asset.
What are the main stablecoins?
The most important stablecoins are those used for trading on crypto exchanges. These include attachedthe most popular stablecoin, which is usually among the top five market caps for cryptocurrencies; USD coin, or USDC, an open source project run by a consortium called Center; and binance USDa stablecoin issued by Binance, the largest crypto exchange in the world.
What can you do with a stablecoin?
The main use of a stablecoin is to facilitate transactions on crypto exchanges. Instead of buying bitcoin directly with a fiat currency, like the US dollar, traders often exchange fiat for a stablecoin and then execute a transaction with the stablecoin against another cryptocurrency like bitcoin or ether.
In this way, stablecoins are a bit like poker chips for crypto exchanges. The most traded stablecoins are each associated with a specific exchange: tether with Bitfinex; USD coin with Coinbase; binance USD with Binance.
Although advanced crypto traders can use stablecoins for a variety of purposes, including staking and lending, most beginners use them to mitigate trading fees. This is because many exchanges do not charge for exchanging US dollars for a stablecoin. Coinbase, for example, does not charge any fees on USDC to US dollar transfers. If you are looking to quickly liquidate bitcoin at a certain price, you can transfer it to a less volatile entity like USD coin or tether.
In fact, tether currently accounts for more than half of all bitcoin traded in fiat or stablecoin, according to CryptoCompare, a global cryptocurrency market data provider.
Remittances are another use of stablecoins. that is, transfer funds across international borders. Sol Digital, a stablecoin pegged to the national sol currency of Peru, launched on the Stellar blockchain in September. It can be exchanged between individuals in different countries without incurring the huge fees charged by third parties for cross-border money transfers.
And it is in this use case that the seed of one of bitcoin’s grandest potential purposes lies, namely, to relieve populations subject to rapid inflation and who could benefit from the transfer of funds from a currency. struggling local to a stablecoin. (As long as the stablecoin is not linked to this local currency, it theoretically be sheltered from regional inflation.)
Are all stablecoins pegged to a national currency?
Similar to how the US dollar serves as a reserve currency for countries around the world, the most popular stablecoins are currently pegged to the US dollar. A single unit of tether, USD coin or binance USD is each worth around $1.
But the underlying asset does not have to be a national currency. The asset could be a commodity like gold (as with kitco gold), an algorithm (dai) or even another cryptocurrency like bitcoin ().
How are stablecoins different from traditional cryptocurrencies?
A traditional cryptocurrency has no central control; it is ruled by the masses. A stablecoin is different in that it is issued and governed by a central authority. When you buy one, you agree that the issuer of that coin has a sufficient amount of the asset it is attached to.
The asset pool, which gives a stablecoin its value, also serves as collateral. As long as the value of the assets is stable, the price of the stablecoin is stable. But since there are no US regulations in place to monitor stablecoin reserves, this equation is based on trust: You are satisfied that the reserve exists and that it is correctly valued.
And sometimes that trust is broken. In February 2021, Tether (the stablecoin tether issuing company), along with affiliated exchange Bitfinex, paid $18.5 million in fines after New York Attorney General Letitia James ruled against them in a case involving the concealment of $850 million that went missing. Tether and Bitfinex have neither admitted nor denied wrongdoing in the Civil Settlement.
“Bitfinex and Tether recklessly and illegally concealed massive financial losses to maintain their scheme and protect their bottom line,” James said. “Tether’s claims that its virtual currency was entirely backed by US dollars at all times was a lie. These companies masked the true risk investors faced and were operated by unlicensed and unregulated individuals and entities. who traded in the darkest corners of the financial system.”
Do I need a special bank account or crypto wallet to buy stablecoins?
You don’t need a special bank account to buy stablecoins, and that alone could make them attractive to unbanked and underbanked populations. But you need a crypto wallet to buy, sell, trade, and store stablecoins, just like you do other cryptocurrencies. And not all wallets support all coins (they are all software, after all). The trick here is to make sure the crypto wallet you choose supports the stablecoins you want. For example, Trezor andthe latest wallets both support tethering.
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