Explained: What Are Stablecoins & Why They Are Popular?
Most cryptocurrencies, as we know, were designed to be used as a medium of exchange rather than just a store of value. However, most crypto coins, including Bitcoin, suffer substantial price fluctuations due to their limited market capitalization. Extreme volatility is a challenging issue since it prevents users from reaping the benefits of cryptocurrency. Hence, the need of this article titled; write what are stablecoins
Imagine how difficult it would be to use Bitcoin or other cryptocurrencies for day-to-day transactions and trading with such significant volatility. This is where Stablecoins come into play.
But what are stablecoins? What are the different types of stablecoins? Why are they so popular? How to buy them? This blog will provide answers to all of these questions.
What are Stablecoins?
As the name implies, Stable coins are crypto coins that are stable and backed by reserve assets. These coins were created to offer price stability to the cryptocurrency market. Since the crypto market cap is relatively small, even little price fluctuations in a few currencies can impact the overall market. This is why we need stable currencies.
The value of a stable coin is pegged to a real-world, stable currency, sometimes known as fiat currencies. It can be linked to a currency, such as the U.S. dollar, or the price of a commodity, such as gold. For example, tether, also known as USDT, is a stablecoin worth one U.S. dollar, and this coin is intended to remain at this value forever.
Traders can use Stablecoins to trade volatile cryptocurrencies for stable cryptocurrencies to reduce their risk.
Let us explain this with an example. If I have invested in Bitcoin and do not want to risk the price plummeting against the U.S. dollar, I can simply exchange my Bitcoins for USD coin and keep my dollar value. Then, when the price of Bitcoin rises or stabilizes, I can simply convert my USD coin to BTC.
Further, Stablecoins can be classified into three types: fiat-collateralized cryptocurrency, crypto collateralized cryptocurrency, and non-collateralized or algorithmic stable coins. What they are and how they work– let’s find out in the following section.
Types of Stable Crypto Coins
Stablecoins are classified into three types based on their operating mechanism. Let’s take a quick look at each of them.
Fiat-Collateralized Stablecoins (Backed by Fiat Currencies)
Fiat collateralized stablecoins, also known as commodity-backed stablecoins, are stablecoins that are often backed by off-chain assets such as fiat currency, commodities, actual gold, oil, and a mix of precious metals. However, most of today’s fiat-collateralized stablecoins use dollars as a reserve currency.
With this type of stablecoins, users typically directly claim the issuer or the underlying asset. The provider of fiat-collateralized stablecoins promises to repay coins at par in the same currency in which they were purchased. The collateral is usually kept with the custodian, in a bank, or in a vault somewhere. These coins are also audited regularly to ensure that they are compliant.
Examples of Fiat-Collateralized Stablecoins: Tether stablecoin (USDT), PAXOS (PAX), Gemini Dollar (GUSD), Digix Gold (DGX), Tiberius Coin (TCX), SwissRealCoin (SRC), etc.
Crypto-Collateralized Stablecoins (Backed by other Cryptocurrencies)
Crypto collateralized stablecoins, as the name implies, are coins that are backed by other cryptocurrencies. Since the reserve crypto coins are likewise volatile, a higher number of cryptocurrency tokens are kept as a reserve for issuing a smaller number of stablecoins to improve the security and stability of these coins. In this type of coin, collateral is held by smart contracts, and collateral can be sold and cleared 24/7.
From a decentralized perspective, the major benefit of crypto-collateralized stablecoins over fiat-collateralized coins is that they are highly transparent because they are open source capital collateralized stable coins. Any user can audit the code and inquire about the amount of collateral kept for backing– monitor stablecoin reserves.
Example of Crypto-Collateralized Stablecoins: DAI
Non-Collateralized Stablecoins (Backed by Algorithmic Mechanisms)
Non-collateralized stablecoins, also known as algorithmic stable coins, are stablecoins that do not rely on a reserve but do have an algorithmic mechanism. To match demand, these currencies algorithmically expand or contract the trade supply. In addition, an algorithmic central bank is also built to match supply and demand.
These stable coins have the significant advantage of being similar to crypto collateralized stable coins that can be built in a decentralized method. Algorithmic currencies, like crypto-based coins, are also quite transparent. The Basis was a well-known example of a non-collateralized stablecoin. However, due to regulatory constraints, the initiative was forced to close in 2018.
Example of Non-collateralized Stablecoins: Basis
These are the three types of stablecoins. Let’s move on to the next section to find out why stablecoins are so popular.
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Why Stablecoins Are So Popular?
Just like Altcoins and Metaverse coins, stablecoins also have several unique advantages. Some of them are as follows:
By linking to fiat currency such as the U.S. dollar or commodities such as Gold, Oil, and others, stablecoins have established themselves as the preferred cryptocurrencies appropriate for beginners or investors looking for stable cryptocurrencies.
Stablecoins could be a better investment during a bear market than other crypto coins. Similarly, during a bull run, it may be advisable to book some profits and use them to buy more stablecoins.
Stablecoins can also be transferred across crypto exchanges for far less trading fees than other cryptocurrencies.
Overall, the primary advantages of stablecoins include their ability to eliminate volatility in the crypto ecosystem, quick and quick transfer across crypto exchanges with less trading fees, and being ideal coins for beginners.
So far, we’ve covered a range of issues relating to stablecoin, such as its definition, different types of stablecoins, and the benefits of crypto coins. Let’s take a look at the top 5 stablecoins in 2022.
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Top 5 Stablecoins to Buy In 2022
The 5 popular stablecoins to consider adding to your crypto portfolio are listed below. Let’s look at their current price, market capitalization, volume, and circulating supply.
Tether (USDT)
Price: $1.00
Market Cap: $78,298,184,275
Volume: $60,935,827,460
Circulating Supply: 78,279,163,467 USDT
USD Coin (USDC)
Price: $1.00 (U.S Dollar)
Market Cap: $43,986,525,949
Volume: $4,028,992,832
Circulating Supply: 43,985,133,926 USD coin
Dai (DAI)
Price: $1.00 (U.S Dollar)
Market Cap: $9,355,856,679
Volume: $613,966,410
Circulating Supply: 9,348,516,877 DAI
PAX Dollar (USDP)
Price: $1.00 (U.S Dollar)
Market Cap: $945,646,728
Volume: $21,804,855
Circulating Supply: 945,642,940 USDP
True USD (TUSD)
Price: $1.00 (U.S Dollar)
Market Cap: $1,416,362,986
Volume: $101,819,250
Circulating Supply: 1,414,435,934 TUSD
These are the top 5 stablecoins to buy in 2022. However, keep in mind that these prices were cited on January 11, 2022. make sure you are up to date on the newest trends before investing in cryptocurrencies, whether stablecoins or Metaverse coins.
A critical question about stablecoins is yet to be answered: How to buy stablecoins? Let’s find out!
How to Buy Stablecoins– 3-Step Guide
Buying stablecoins or other crypto coins is much simpler and faster than you might think. These coins can be traded on cryptocurrency exchanges such as Fasset. The process is simple and consists of only three steps outlined below.
Step 1: Sign up for the Fasset cryptocurrency exchange.
Step 2: Select a payment method.
Step 3: Buy and trade stablecoins and other cryptocurrency tokens such as Metaverse tokens and Bitcoins.
That’s all! Moreover, the Fasset is a cutting-edge, user-friendly, and secure cryptocurrency trading platform ideal for both beginner and expert traders.
In addition to trading cryptocurrencies, the Fasset app will enable you to perform a variety of other trading-related activities, such as keeping track of your investment, gaining insights into your investment through the portfolio dashboard, sending and receiving cryptocurrencies within the app, reviewing past transactions, and smoothly withdrawing your money, to name a few.
So now you know everything there is to know about stable coins, including their types, benefits, how to buy stable coins, and the top 5 stablecoins to invest in 2022.
However, before investing in cryptocurrencies, we suggest that you conduct thorough research or seek professional guidance. Read our previous blogs to learn more about cryptocurrencies, NFTs, and the virtual financial world.