What Are stablecoins And Should You Buy Them?
We will reveal to you the useful features of the crypto world, namely, we will figure out how stablecoins work and why crypto investors love them so much. Crypto learning can take time, but once you understand you can enjoy it at fullest.
The fact is that bitcoin and other cryptocurrencies are very, very volatile, and it is this volatility that is so attractive to investors. Of course, you can lose all your money on any coin or, conversely, become a millionaire overnight.
However, there are cryptocurrencies designed to provide stability and an unchanged course. Stablecoins are what they are known as, and they are significant players in the cryptocurrency markets. A stablecoin has its own twist: instead of being “mined” by an open, distributed network of computers, a stablecoin derives its price from the value of another asset. In other words, the stablecoin is pegged to another asset. The stablecoins that are traded on cryptocurrency exchanges are the most well-known ones. These include, for example, Tether (USDT), USD Coin (USDC), and Binance USD (BUSD).
How to use stablecoins?
The main use of a stablecoin is to facilitate trading on crypto exchanges.Rather than immediately purchasing bitcoin with fiat money like the US dollar, dealers frequently convert cash into a stablecoin before exchanging the stablecoin for another cryptocurrency like bitcoin or ether. Stablecoins can be used for staking, borrowing, and other advanced crypto trading strategies, but most newcomers use them to lock in an asset's value. For example, in the BTC/USDT pair, there is always an understanding that the value of Bitcoin is actually displayed in US dollars, but trading is carried out in its USDT equivalent.
Another use of stablecoins is money transfers across international borders. For example, Sol Digital, a stablecoin pegged to the national currency of Peru, can be exchanged between individuals in different countries without significant fees charged by third parties for cross-border money transfers. And as long as the stablecoin is not pegged to the local currency, in theory it will be insulated from regional inflation.
What are centralized stablecoins?
Most popular stablecoins are issued by centralized issuers. They each oversee a fund that contains reserves of different assets and securities. The fund is audited on a regular basis to ensure that the declared size and composition match the actual ones.
Tether publishes the results of such reports on its website. It also represents the current composition of the reserves.
Operators of stablecoins are organizations licensed in a significant jurisdiction. Among the top two dollar-denominated stablecoins, USDC is run through a partnership between Circle and Coinbase in the United States. Mostly cash and short-term US government bonds are under its control as reserves. The business that oversees the BUSD coin's reserves is based in the state of New York.
What are centralized stablecoins' benefits and drawbacks?
Centralized stablecoins, on the other hand, are particularly stable because their price is completely supported by assets with low volatility. They are also liquid, meaning that practically any bitcoin trading platform may access them. Popular stablecoins are also useful for capital storage and settlements between parties. They can easily be used as the basis currency in trading pairs on cryptocurrency exchanges.
However, centralization is one of these coins' weaknesses. All stablecoin holders may have issues as a result of any issues with the entity that manages the reserves, including claims from regulators and manipulation of reporting. Furthermore, the stablecoin operator's precise usage of the reserves is unknown.
Conclusion
Stablecoins are an integral part of the cryptocurrency economy, providing a safe and secure medium of exchange for traders and investors. Moreover, stablecoins serve as a major component of strengthening the cryptocurrency economy, especially when the market is bearish.