Stablecoins have become popular in the past few years due to the volatile nature of Bitcoin and Ethereum. Bitcoin prices fluctuate based on market demand and supply, this poses several problems.
For example, if you were to buy $100 worth of bitcoin and the market dips by 50%, you would end up with half the initial price you bought. Stablecoins were designed to solve the problems around volatility.
They are cryptocurrencies that are backed by other assets in order to guarantee stability. Stablecoins can be backed by real-world assets like gold, silver, fiat currencies, or cryptocurrencies.
These forms of digital assets grew in popularity after the 2017 crypto bubble, where bitcoin climbed to $20,000 and subsequently lost more than 70% of its value. Investors began to look for less volatile digital assets as a store of value.
Stablecoins became the ideal digital asset for many since they retain value and serve as a hedge against inflation when compared to a traditional savings account. Since then the stablecoin market has continued to grow and is now worth $130 billion according to data from
CoinMarketCap. |
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What types of Stablecoins exist? |
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Stablecoins can be backed by fiat currencies like the U.S. Dollar, British Pounds and Nigerian Naira. These forms of stablecoin are the most popular in the crypto space and dominate the stablecoin markets. Major fiat-backed stablecoins include USDT, USDC, and BUSD.
Issuers of fiat-backed stablecoins are required to hold the fiat equivalent in a reserve that can be audited. For example, if Breach issues 10 million tokens of a stablecoin backed by U.S. dollars, it must hold 10 million dollars kept in reserve backing the issued tokens.
Several dollar-backed stablecoin issuers like Tether and Circle have faced accusations of not having enough reserves to back their stablecoins thus calling their stability into question. |
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Commodity-Backed Stablecoins |
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Commodity-backed stablecoins are backed by hard assets or commodities like gold, silver, real estate, and more. Gold is the most common asset used to collateralize these stablecoins due to its availability and high value.
Commodity-backed stablecoins also provide investors with the opportunity to invest in real-life assets. Each token represents a percentage or full value of the backing asset.
Popular commodity-backed stablecoins include Paxos Gold (PAXG), Digix Global (DGX), Tether Gold (XAUT), and Perth Mint Gold Token (PMGT)
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Crypto-Backed Stablecoins |
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Crypto-backed stablecoins are stablecoins backed by other crypto assets. Due to the volatile nature of cryptocurrencies, most crypto-backed stablecoins are overcollateralized to ensure stability.
For example, a $10 crypto-backed stablecoin may be pegged to a crypto asset worth $20. This ensures that even when the cryptocurrency loses value, the stablecoin has enough of a cushion to remain at $10.
An example is DAI, a popular crypto-backed stablecoin tied to the U.S dollar and runs on the Ethereum blockchain network.
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Should you buy stablecoins?
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The cryptocurrency market is very volatile, and stablecoins remain a safer alternative to other forms of crypto when trying to maintain value. If you live in a developing region, holding stablecoins is an attractive option to hedge inflation without the fluctuations associated with coins like bitcoin and ethereum.
It is safer to hold stablecoins with large market caps like USDT, USDC and DAI. especially if you're new to crypto. You should always do your own research on your chosen stablecoin and the asset backing it.
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