Stablecoins Explained- Types, Advantages and Investing Guide
The price of bitcoin may be hitting the sky today, but it may also crash to the ground tomorrow in the volatile cryptocurrency market. Also, investors cannot place their trust in the world of cryptocurrencies due to their extreme unpredictability.
Now picture having access to an affordable, secure, and asset-backed cryptocurrency. Certainly, asset-backed financing seems impossible at first, but stablecoins make it practical. Yeah, it is a brand-new phrase that is gaining traction in the cryptocurrency world. Let’s start discussing asset-backed cryptocurrencies without further ado since you might be interested in learning more.
What is Stablecoin?
Stablecoins are cryptocurrencies that remain steady and firm, as the name implies. Some coins are secure because they are less volatile. Gold, precious metals, US dollars, and other real assets, such as other fiat currencies, serve as benchmarks for stablecoins.
A stablecoin may also be backed by real estate, thus, you could buy an entire stablecoin reserve by pledging your hotel or villa. Cryptocurrency price volatility can be moderated by tying them to a physical object. In long-term investments, stablecoin holders can anticipate a fixed return on their holdings.
The reserve-backed stablecoins offer security and price stability. To limit price fluctuations in the cryptocurrency market, stablecoins were introduced. Although Bitcoin, Dogecoin, Ethereum, and Litecoin may be the favourites of investors, these cryptocurrencies are prone to sharp volatility.
Stablecoins can be held, traded, lent, borrowed, and used to make payments internationally. They provide the most practical means of moving money overseas. Since tangible assets back stablecoins, they are helping to close the gap between fiat money and cryptocurrencies.
Advantages of Stablecoins
- Comparatively speaking, stablecoins are less erratic than other cryptocurrencies.
- Investments in stablecoins are secure since stable assets back them.
- Payments made internationally have never been simpler thanks to stablecoins.
What Provides Stability to Stablecoins?
You may be aware that to create money, a certain amount of collateral must be set aside; this collateral can take the form of gold, government securities, or assets from other countries. As a result, the amount of money in circulation will never exceed the needed amount. The government only produces a set amount of money, typically backed by collateral, to reduce inflation risks.
The creator of “stablecoins” follows a similar procedure; often, a particular stablecoin sets aside a specific amount of gold, US dollars, or other cryptocurrencies before minting stablecoins. This guarantees that the supply of stablecoins never exceeds the demand for them.
4 Different Types of Stablecoins
1. Commodity-Backed Stablecoins
One of the most widely used stablecoins is backed by a commodity. Priceless assets like gold, platinum, and real estate back stablecoins of this type. The most widely used stablecoins are those backed by gold since gold often increases in value over time. These stablecoins also provide greater yields. Examples of stablecoins with gold backing are Digix DAO, Gold Mint, and Ekon Gold.
2. Fiat Collateralized Stablecoins
Stablecoins with fiat backing are backed by fiat money. Real-world currencies, such as US dollars, Euros, British Pounds, and Canadian Dollars, are fiat currencies. These stablecoins have a 1:1 backing, which means that 1 stablecoin will be equal to 1 unit of either the British pound or the American dollar.
3. Algorithmic Stablecoins
Stablecoins of this kind are not backed by any commodities or fiat money. The foundation of algorithmic stablecoins is an algorithm. This kind of stablecoin requires modifications to the algorithm that regulates the supply and demand of stablecoins. If the price of the stablecoin rises, the algorithm will modify itself to issue more coins, and if the price of the stablecoin falls, the algorithm will modify itself to sell the coins.
4. Cryptocurrency Backed Stablecoins
Other cryptocurrencies support stablecoins in this category. This means that $50 in bitcoins will be held in reserve for every $100 in crypto-backed stablecoin minted. Stablecoins backed by cryptocurrencies are more erratic than other varieties. Regarding interest rates, they experience irrational highs and lows. An illustration of a stablecoin backed by cryptocurrency is wrapped bitcoin (WBTC).
How to Invest in Stablecoins?
By lending and staking stablecoin, an investor might earn interest. When a stablecoin is lent, it is given as a loan to other investors. When a stablecoin is staked, it is used in the proof-of-stake process to earn rewards.
A user must first open a demat account to earn interest on stablecoins. Once the demat account has been opened, the user must select an app that enables cryptocurrency trading. Stablecoins can be purchased on several platforms, including Coin DCX, Binance, and Digifinex.
After choosing the application, the user will be asked to deposit a certain amount into the account. On the cryptocurrency platform, any method of payment is accepted. The user’s bitcoin wallet will also receive the deposit amount.
The consumer can purchase any stablecoin of their choice once the funds have been transferred into their cryptocurrency wallet.
Investors seeking long-term gains search for secure investments that offer reliable returns. The investment portfolio may include stablecoins. Stablecoins are a secure method for long-term investing, just like mutual funds and fixed deposits.