Stablecoins are now an increasingly popular way for investors to enter the crypto market. They are partially immune to the price fluctuations that we have all gotten used to with other popular coins. A stablecoin describes a cryptocurrency linked to an asset like the U.S. dollar whose value essentially doesn’t change.
Most stablecoins are pegged to the dollar, but they can also be pegged to other fiat currencies issued by governments worldwide, such as the pound, rupee, or yen. There is currently $135 billion of stablecoins in circulation, which is a rise of more than $10 billion in the last year alone.
Let’s look at the rise of stablecoins and how we can compare them to the major cryptocurrency coins.
Where Did Stablecoins Come From and Why Are They Gaining Traction?
The first stablecoin ever created was Tether (USDT) back in 2014, and most that have followed are based on it. With stablecoins, collateral is put in reserve with a central financial institution and must remain proportionate to the number of coins in circulation. This means a user receives a token for every dollar that they deposit.
Stablecoins were originally used to buy other cryptocurrencies when cryptocurrency exchanges couldn’t work with traditional fiat currencies, unlike today where there is far more access for crypto exchanges. They are now incredibly in demand thanks to easy access at all times, anywhere in the world, without any reliance on banks.
Another advantage is that stablecoins can work with smart contracts on blockchains. This means an agreement between the buyer and seller, automatically written in code, to determine how and when to transfer the money. It saves the hassle of requiring legal authority to approve the transaction.
How Do Stablecoins Differ From Other Cryptocurrencies?
The main difference between stablecoins and other cryptocurrencies is the lack of volatility in price fluctuations due to being pegged against a fiat currency. Stablecoins do not have a limited supply, unlike conventional coins. Instead, they are safeguarded to protect investors from being affected by a crash in the crypto market. For instance, USDC claims to have as many dollars as Tether coins in circulation. In addition, the non-volatile nature of stablecoins means that they can be suitable for business purchases, not just in the use of trading crypto.
In terms of regulation, which is a hot topic in the cryptocurrency world at the moment, the stability of stablecoins is under fire. In the same way as with other cryptocurrencies, regulators are worried about a systemic risk, whereby the power could end up in the hands of just one provider. A report by the President Working Group recommended that stablecoin providers should be forced to become banks, but this is unlikely to happen anytime soon. The introduction of new stablecoins on the market will hopefully alleviate the concerns over one provider having too much power.
Stablecoins certainly bridge the gap between fiat currencies and cryptocurrencies. They can also potentially lead the way towards integrating traditional financial markets further with the digital asset finance industry.
For advice about how to trade with stablecoins, speak to one of our advisors at Delchain. You can also read more Delchain blogs on cryptocurrency regulation and the rise of NFTs.