What are Stablecoins Used for?

Jump to page contents

What are Stablecoins Used for?

If you’re following what’s been happening in the bitcoin trading scene for the last couple of years, you’ve probably heard about the term ‘stablecoins’. It seems that the trend of creating this type of cryptocurrency has been on the rise lately, as many analysts agree, they indeed seem like a step forward in crypto research.

So what are stablecoins exactly? More importantly, what are they used for? Let’s take a closer look…

First things first: What are Stablecoins?

In order to understand stablecoins, we have to talk a bit about volatility, something you definitely need to get accustomed with when trading. Basically, volatility indicates price changes of an asset over a certain period of time. Some assets, such as the US dollar are considered to be almost non-volatile. Therefore, the worth of one dollar will not change that much for a long time.

On the other hand, Bitcoin and many other altcoins have practically become synonymous for being volatile assets. You may have noticed that the price of BTC regularly fluctuates. In fact, Bitcoin’s value goes up and down a lot and that’s something that many investors try steering away from. One could simply say that the price of BTC is not stable.

So, where do stablecoins come into the equation?  Essentially, they are cryptocurrencies, but their prices don’t fluctuate as much as the price of many other cryptos. How is possible? What’s the secret formula for making crypto coins stable?

Asset Management

Its Value is Pegged to Another Stable Asset

Crypto professionals nowadays managed to pull off this simple yet effective trick. By means of technology that makes up cryptocurrencies and adding some classic financial tricks that they had up their sleeve, and voila, stablecoins were born!

Basically, the value of every stablecoin is the same as the asset it is connected to. That way, there’s little room for price instability, meaning crypto enthusiasts don’t have to fear losing half of their fortune with a sudden price drop. So what are the stablecoins main features?

There are three models of stablecoins right now.

Asset-backed Stablecoins

The ones we’ve been talking about so far are called asset-backed stablecoins. It means that the price of a coin is pegged to an asset that physically exists. Commodities are one of the standard examples. Right now, there are coins such as DGX which are pegged to the value of gold. Essentially, as an investor, you will be able to invest in gold by buying its tokenized version. Buying one DGX is basically like buying one gram of gold.

Crypto-collateralized Stablecoin

The second popular type of stablecoin is often referred to as cryptocurrency-collateralized stablecoins. Essentially, this type of coin relies on other cryptos which are considered collaterals in this case. They are used in order to minimize the volatility of a stablecoin. One of the most popular examples at the moment is DAI which has its price smoothened out by a smart contract that buys and sells collateral cryptos such as Ethereum and Maker.

Non-collateralized Stablecoin

As the name suggests, this type of stablecoin doesn’t actually have collateral. Instead, it employs complex algorithms that make sure their value remains relatively unchanged over time. This type of cryptocurrency is fairly new and experimental, but there are already some projects, such as Ampleforth, that are focused on researching non-collateralized stablecoins.

Stablecoins' Functionality

Stablecoins’ Functionality

Just like any other cryptocurrency (or any other currency, for that matter), stablecoins are meant to be a type of asset used for making payments. Much like BTC or dollars. However, even BTC still struggles to reach massive adoption, meaning there’s no point talking about stablecoins in this regard right now.

Therefore, other than payments, stablecoins can be traded and invested in, much like in Bitcoin and other cryptocurrencies. All you have to do is find an online cryptocurrency exchange that supports this coin and start your trading journey. Most of the exchanges will probably allow you to exchange it for BTC or use BTC to buy it. However, some might allow additional trading pairs that include fiat currencies as well.

Hodling may not make much sense with stablecoins on a short-term basis. Since their price is stable, overnight fluctuations are not possible. Therefore, buying $1,000 worth of stablecoins and earning thousands if their price suddenly goes up is not an option. On the other hand, if enough people invest and there’s enough hype about them, the price may steadily go up. Yet, this is a vastly unexplored trading area at this point.

According to the statistics by CoinMarketCap, Tether is currently located on the sixth position of the list of coins with the highest market capitalization. Tether is currently worth $4.63 billion.

Although this is much better than most of the other stablecoins, it’s still nowhere near Bitcoin which rules over the crypto dominion with a total market cap of $159.59 billion.

USDT is pegged to the American dollar, meaning a single unit of this cryptocurrency is worth exactly $1

A Stack of Bitcoins on US Dollars

Conclusion: Stablecoins are still young

So in retrospect, what is stablecoins stability and does it make sense to dig deeper? Well yes they have been trending lately and odds are that if you are in to cryptocurrencies then this will be right up your alley. It is new and to be honest, cryptocurrencies are still in its infancy.

Although stablecoins seem like a really good idea, they are still not as popular as the better known, more mainstream cryptocurrencies. All technologies surrounding cryptocurrencies are still very young. Therefore, crypto enthusiasts are only scratching the surface of the possible potential, and, currently, stablecoins are one of the most significant results of that research.

Author Mary Acallahan

Ready to join our tribe?

We respect your email privacy

Subscribe now to recieve exclusive updates and offers!

Recently Similar Guides

Latest Guides

Crypto Mining,Mining

CPU vs GPU Mining at Home: Which is Better?

As cryptocurrency becomes mainstream, more and more people are getting involved in the crypto-world. This has also raised curiosity on how to mine cryptocurrencies and not just exchange and purchase them. As exciting as this sounds, crypto-mining is not easy to achieve, as it requires deep technical knowledge. If mining cryptos is something you are […]

15 June, 2021
Crypto Wallets,DogeCoin,Ethereum,Litecoin,Ripple

Best Ways for Coin Storage to Protect Your Cryptocurrency

As the price of Bitcoin and other cryptocurrencies continues to soar, news of people who have lost access to their crypto stash is always hitting the headlines. Recently, Stefan Thomas, a German-born crypto enthusiast, made news when he had only two attempts to his password for him to access his 7,002 Bitcoins worth millions of […]

9 June, 2021
Crypto Mining,Mining,Monero

How To Mine Monero (XMR) In 2021

In this how to mine Monero guide, we will provide you with the important information you need to know before you mine this cryptocurrency. We will also offer guidance on building your Monero mining rig and where you can sell your coins for a profit. What is Monero? Monero is an open-source digital currency that […]

6 June, 2021
Bitcoin,Crypto Mining,Crypto Wallets,Litecoin

How to Mine Litecoin in 2021?

Although Bitcoin is seen as the “gold” of cryptocurrencies and a value for long-term purposes, Litecoin is seen as the “silver” of cryptocurrencies and a trading tool for cheaper and daily purposes. Litecoin was released on October 7, 2011, through an open-source client on GitHub. The Litecoin network was launched on October 13, 2011. It […]

2 June, 2021
Altcoins,Cryptocurrency,Exchange Platforms,Investment

Open Source Cryptocurrency Exchange Explained

Cryptocurrencies are turning the Fintech world upside down. As the immense power of Blockchain technology continues to unfold, it comes with limitless opportunities that are transforming the global economy. Apart from the decentralized nature of crypto, there’s one fundamental aspect of this mind-boggling technology: the open source aspect of cryptocurrencies. To understand how crypto works, […]

19 May, 2021
Cryptocurrency,Investment,Liquidation

Cryptocurrency Liquidity And The Importance Of It

The worldwide recognition of cryptocurrency has drawn people’s attention to certain terms like market capitalization, staking, harvesting, NFT, liquidity, and many more. Cryptocurrency traders know that they have no other option than to learn these terms if they want to succeed in the crypto market. This is because such terms make it easier for them […]

17 May, 2021
Bitcoin,Bitcoin Cash,Litecoin

Litecoin vs Bitcoin Cash – Which is better?

Bitcoin is considered one of the biggest innovations of the recent past. However, the rapid development also brought problems that were not expected so soon. Scalability, in particular, has become a challenge. In response, a hard fork of Bitcoin eventually created Litecoin and Bitcoin Cash. Litecoin (LTC) was launched in 2011, making it one of […]

14 May, 2021
simulated trading,Trading,virtual trading

How To Automate Bitcoin Trading?

Bitcoin is the most accepted, traded, and valuable cryptocurrency. It has come a long way since its launch in 2009 and virtually all crypto exchanges offer bitcoin on their platform. If you’re looking to trade bitcoin, you should consider using crypto trading bots. This article will touch on what trading bots are and will provide […]

11 May, 2021