As stablecoin is a new cryptocurrency that can be backed by fiat currencies (government-issued/controlled currency like the US dollar, Euro or Japanese Yen), gold and/or other commodities. The reason stablecoins have been set up this way is literally to make it a more stable option by reducing the potential volatility that tends to affect the value of other cryptocurrencies.
And that in short is the key benefit of a stablecoin.
They will – according to experts - finally provide users with a more consistent cryptocurrency linked to a specific value. However, in addition to providing greater stability, Stablecoins also offer the properties that have helped cryptocurrency explode onto the financial landscape. Transaction costs are low, transactions can be made instantaneously and they operate outside the regulatory control of the other financial markets.
Economic instability has seen the currencies of Argentina, Venezuela, Nigeria, Belarus, Malaysia and Indonesia amongst others crash recently. Could stablecoins provide a viable and more reliable alternative if the uncertainty and hyperinflation so many countries are currently facing? Obviously time will tell but we are seeing crypto-traders starting to transfer their holdings into stablecoins to insulate themselves against the drops in value they’ve foreseen for their cryptocurrencies. This is a move that’s supported by the fact stablecoin’s value tends to rise when cryptocurrencies’ values drop and vice versa.
In terms of the actual coins themselves there are 4 main types:
1. Fiat-backed stablecoins
These are backed by fiat currency at an exchange rate of 1:1 so the value always matches that of the corresponding currency. This is currently the most common type of stablecoins and the majority are backed by the US dollar.
The best known of the fiat-backed stablecoins are Tether, Circle, TrustToken, Paxos and Gemini Dollar.
2. Commodity-backed stablecoins
These are stablecoins backed by commodities like oil (as in the case of Venezuela’s ‘national cryptocurrency’, the Petro), precious metal (usually gold) or grain and well known examples include Digix and G-Coin.
3. Crypto-backed stablecoins
These are stablecoins that are backed by another or a mixture of the cryptocurrencies with the highest market values. Bitcoin and Ethereum are two of the most commonly used coins. The reason for using more than one currency is to minimise any risks a sharp drop in value in any of the backing currencies may pose to the investor to maximize the likelihood of maintain the stablecoin’s value.
The best known crypto-backed stablecoins are Maker DAO, BitShares and Synthetix.
4. Non-collateralized stablecoins
These stablecoins aren’t backed by any assets but instead use algorithms to monitor supply and demand for stablecoin to keep the value stable. Carbon and Kowala are common examples of non-collateralized stablecoins.
Although stablecoins have been designed to be more stable than previous cryptocurrencies, there are still risks involved. If you are thinking about investing in stablecoin you need to fully understand both the risks and the benefits, both of which we can talk you through so before you make a commitment, please call us today on 020 7792 5649 or email us at This email address is being protected from spambots. You need JavaScript enabled to view it..
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