Cryptocurrencies are becoming more and more popular, but one of their Crypto Mystery is that they are very volatile. Here is where stablecoins can help. Stablecoins have the same benefits as cryptocurrencies, but their price stays the same.
Additionally, stablecoins are a type of cryptocurrency whose value on the market is based on something outside of the currency itself. It just means that, unlike fiat money, reserve asset acts as their backup, like gold was during the Gold Standard. Since assets back them, the prices of stablecoins don’t change as much as the prices of other cryptocurrencies.
What is a stable coin?
Stablecoins are cryptos that are backed by fiat currencies, such as the dollar, the pound, the shekel, and the rouble.
The concept is that, apart from other cryptocurrencies, such as bitcoin, the price of a stable coin stays the same, based on the value of the fiat currency that backs it.
Stablecoins are used as places to store value or as units of account. They are also used in other situations where volatile cryptocurrencies might not be as useful. To keep prices stable, various stablecoins use various methods. Many of them are pegged with many things; some with fiat currencies, some with some products or services.
How may Stablecoins be categorized?
Stable coins have lasting value because a reserve asset backs them. Depending on the type of reserve asset that supports its value, the stable coin may be one of 4 types:
- The Fiat currency
It’s not easy to say that a stable coin is one that is backed by fiat currency. First, their value is always 1:1. For example, Tether is a stable coin that is worth the same as the US dollar. For a stablecoin to exist, fiat currency is placed as collateral.
- Non-collateralized
The Seigniorage Shares model is used by non-collateralized stablecoins but not by collateralized stable coins. This is because the value of money changes based on how much it costs to print. It’s called Seigniorage. The algorithm controls how many of these coins are in circulation, which changes based on the price. If the value of stable coins falls below the pegged currency, you can sell them. However, if the price goes up, you can buy them.
- Cryptocurrency-backed
Stable coins that are backed by cryptocurrencies work the same way as stable coins that are backed by fiat currency. Instead of fiat currency, it uses cryptocurrency as collateral. For instance, Ethereum can be used as a guarantee for a stable coin that is backed by another cryptocurrency. Security pledges are utilized to make cryptocurrencies less volatile. Unlike other stablecoins, this one won’t be backed by 1:1 crypto collateral.
- The commodities-backed
Commodity-collateralized stable coins are stable coins that are backed by things like real estate or precious metals. Gold is one of the most prevalent commodities that can be used to back stable coins.
Advantages of Stablecoins
Here are a few advantages of a stable coin. Let’s have a look.
- Payments can be made in many locations
Same thing with stablecoins; you can transfer them over the web without having to worry about banks, countries, or other people. Payments are made directly, and they can’t be changed. The payments are made on the blockchain; hence, they can’t be censored or blocked.
- Low Costs
There are no middlemen, so transactions are cheaper, and because stablecoins are peer-to-peer, there are no fees.
Stablecoin transactions are cheaper than normal credit card payments or bank transfers, which charge a fee and add additional costs right away.
- Transparency
Stablecoin transactions happen on public blockchains, so anyone can see them, even if they didn’t start them. This doesn’t work with manual payments, but it does give a lot of people the details they’re looking for.
- Transactions take an endless amount of time
Traditional transactions take a lot longer than blockchain-based exchanges. Due to anti-money laundering (AML) and checking procedures, a lot of people do this. Still, one of the important causes is that there are no middlemen and no waiting times. Most of the time, your recipient’s account will be able to get the money immediately after you start sending it. However, this isn’t always the case.
Conclusion
Stablecoins are a good option for investors since they offer one of the best of all worlds. Consequently, investors do not incur significant losses when other currencies enter bear markets, as can occur when other currencies decline. Finally, you must select your cryptocurrency trading platform with care. Therefore, it is safe to say that Bitcoin Era is a great and secured platform for every type of crypto investors.