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What Is A Stablecoin? 3 Things You Should Know!

What Is A Stablecoin? 3 Things You Should Know!

what is a stablecoin

Have you ever come across the term “stablecoin” and wondered what this is and how it differs from other kinds of cryptocurrencies? A lot of people talk about it being a less volatile and less risky option, but do you know what they mean and why this might be the case? Cryptocurrencies are a big thing in our world at the moment, with a lot of people staking large amounts of money on them, so it’s important to understand how they work and what the different kinds are.

A stablecoin is a kind of cryptocurrency that is (usually) pegged to an external reference point as a way of helping it achieve a steady and reliable value. This means that these coins don’t go up or down in value as sharply as many of the other forms of cryptocurrency do and makes them a far more useful kind of currency if you actually want to use them in the real world. Very few businesses will let you pay for products or services using traditional cryptocurrencies, because they are simply too volatile for them to easily accept them.

However, a surprising number of places will accept stablecoins because they are so much more reliable. You probably won’t be able to use them at a local grocery store for a while yet, but you can use them in exchange for services in some circumstances. For example, you can play games with Tether on websites like Bovada, which is currently one of the largest and most popular kinds of coins. Tether is pegged to the U.S. dollar at a rate of 1:1, which makes it much more attractive for vendors to accept. With all that in mind, let’s learn more about stablecoins.

1) Stablecoins Don’t Have To Be Linked To Anything

As we’ve established, stablecoins are usually linked to a tangible asset in order to make them stable. For example, one coin may equate to one dollar (or some other form of currency). This is known as a fiat-backed stablecoin. These are the commonest kind and are essentially a tokenized version of a fiat currency. A stablecoin can also be linked to other assets, including things like gold. There are also crypto-backed, algo-based, and commodity-backed stablecoins. Some stablecoins are linked to a cryptocurrency and use an algorithm to keep their value.

It’s worth knowing, though, that stablecoins don’t legally have to be linked to anything, and they aren’t necessarily “stable” at all! The link between the coin and a tangible asset is the norm, but not a requirement. While many stablecoins will be backed by a tangible asset, some are not – so don’t be fooled into thinking that these are currencies that can never fail or depreciate. A lot of investors have fallen foul of this and had an unpleasant surprise!

One example would be the Terra stablecoin. This was backed by a cryptocurrency called LUNA and its value was kept by an algorithm. When the value of the cryptocurrency plummeted, so did the stablecoin, crashing from $80 per token to less than $1 per token. It’s crucial to be aware of these potential drawbacks if you’re thinking of investing in stablecoins, because although a lot are pegged to stable assets, the name alone doesn’t guarantee that the value is secure. In short, do some thorough research before buying stablecoins.

2) Stablecoins Can Make Transactions Simpler

You might be wondering why anybody would bother buying stablecoins if they aren’t necessarily safe and they’re still only accepted in certain places. The reason is that they do have some significant advantages over investing your money in standard currency. One of these is that they can make transactions faster and simpler, especially if you’re handling money internationally.

You’re probably already aware that banks are notoriously slow and expensive when it comes to international transfers, and they tend to ask for piles of paperwork in order to do it. They are known for slapping fees on every part of the transaction, offering unfavorable exchange rates, and asking a lot of questions before they transfer the money. These things have their benefits, but they make an international transfer slow, expensive, and open to a lot of scrutiny.

Using stablecoins will help you avoid some of these issues, and may give you more privacy. If you’re looking to complete a transfer quickly or privately, they can be a pretty good option. Of course, there are many different kinds of stablecoins and it’s important to understand how the individual ones operate before assuming that they’ll make international transfers easier, but this is certainly an advantage that some offer.

3) Stablecoins Affect The Value Of Other Cryptocurrencies

The presence of stablecoins can have quite a big effect on the value of other cryptocurrencies. If people start converting their cryptocurrencies into stablecoins, the value of those cryptocurrencies will drop. This could happen with stunning speed.

As an example, because around 20% of Bitcoins are owned by less than 500 people, those people have a pretty big influence on the value of the coins. If they decide to convert to stablecoins instead, Bitcoins will be massively devalued. If you’re thinking of investing in any kind of cryptocurrency, you should make sure you’re aware of this before you spend any money!

 

Featured image provided by Worldspectrum; Pexels; Thanks!

DevX Editor

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