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Stablecoins and their role in the cryptocurrency market

The cryptocurrency market is a vast and volatile one. Traders do their best to minimize risks using techniques and strategies, hoping to further their investments and make a profit in the future. One thing they do to achieve this is use stablecoins. You can learn more about this in the coming sections that define stablecoins and what they have to offer to traders around the world. 

What are stablecoins and how do they work?

Stablecoins are a form of cryptocurrency partially backed by a physical commodity like gold or fiat money. As the name suggests, stablecoins are meant to offer more stability to those that choose to invest in them. 

Since the currency is partially tied to that of a government-backed, reserved asset, it is less volatile compared to the other cryptocurrencies in the market. As a result, investors won’t have to worry about how prices could rise or drop and can rest assured that their assets will not be susceptible to the push and pull of the market if they convert them to stablecoins.

The values of a stablecoin are maintained through a process called backing, also known as collateralization. This is a mechanism that follows a specific algorithm to buy and sell a reference asset without the risk of liquidation. 

The whitepaper for stablecoins was first introduced back in 2012 by J.R. Willett. Since then, the idea took off and billions of dollars have been invested into these unique kinds of cryptocurrencies. 

Types of stablecoins

There are currently three types of stablecoins, namely: 

Fiat-Collateralized Stablecoins 

This type of stablecoin makes use of fiat money or reserves as a form of collateral. The U.S. dollar is currently the most popular option for this, but it’s also possible for stablecoins to rely on commodities like gold, silver and even oil. 

Crypto-Collateralized Stablecoins

If the first type of stablecoin is backed up by physical commodities, Crypto-Collateralized Stablecoins are backed up by other digital currencies. To avoid volatility in this sense, the stablecoins are collateralized once more. This means more cryptocurrencies are kept as a reserve while the issuance of stablecoins remains the same. 

Non-Collateralized Stablecoins

Compared to the previous two, this type of stablecoin does not make use of any reserves at all. Instead, it relies on a certain process or mechanism that automatically adjusts the supply to maintain price stability. 

An example would be using smart contracts, an agreement between buyer and seller that is sealed in code and cannot be changed. This allows stablecoins to maintain their steady value despite changes in supply. 

Stablecoins: What they bring to the crypto market 

The main goal of stablecoins in the market is to offer stability and a more consistent trading experience to investors. This is so you no longer have to worry about rapidly increasing or decreasing values in the market, but instead rely on a slower and more predictable process.  

Stablecoins are perfect for quick transfers and payments. Some convert their coins to stablecoins before sending them so they won’t be affected by price slippage. On another hand, investors also use this to keep their assets safe from price drops when they’re preoccupied. 

For example, you can exchange your Bitcoin (BTC) to Tether (USDT) before you sleep so you can rest assured that when you wake up, your assets aren’t affected by the market movement. You can then exchange your USDT back to BTC for trading or investing.

The best stablecoins to invest in 

With all this talk about an amazing form of cryptocurrency that is less volatile, you might be curious to know how you can get your hands on it yourself. The great news is that there are lots of different stablecoins that have an increasingly high market cap and trading volume. Check out the list below to learn more about these: 

Tether (USDT)

Out of all the stablecoins, Tether remains to be one of the most popular ones. It was first launched in 2014 and was previously named Realcoin. Tether is tied to the U.S. dollar as its collateral and has a current market cap of $78.26 billion. 

Dai (DAI) 

Dai is covered or backed up by an Ethereum-based currency instead of fiat or physical commodities. This stablecoin has been around since December 2017 and has since maintained a spot as one of the best stablecoins out there. DAI currently has a market cap of US$9.39 billion. 

Binance USD (BUSD)

Launched by the world’s largest cryptocurrency exchange, Binance USD was first introduced to investors in September 2019 and features a collaboration between Binance and Paxos, a multi-line crypto platform that works with settlement services, brokerage and stablecoins. As of now, BUSD has a market cap of US$14.64 billion. 

USD Coin (USDC) 

If Binance involved itself in stablecoins, the same thing goes for Coinbase, another big crypto exchange in the industry. First launched in September 2018, USD Coin has a current market cap of US$42.61 billion and relies on the U.S. dollar as its collateral. Out of the different stablecoins in this list, the USD coin is the second-largest by market cap. 

Be sure to take a look at some of these stablecoins and see if they are a good fit for your preferences when trading. Rest assured that they are the best in the market and will be a great addition to your portfolio. 

Invest and learn more about stablecoins today!

Furthering your knowledge on digital assets like stablecoins is the first step to improving your investments. So, what are you waiting for? Try your hand at investing in stablecoins today and add it to your growing digital asset portfolio. You will find that it’s a worthwhile investment that all traders should know more about. 

Learn more about stablecoin meanings and more crypto content when you visit Cryptoshimbun!

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