Bitcoin seems to be a very attractive but risky asset. However, there is a safer alternative – stablecoin. It has all the advantages of cryptocurrencies, while its price is stable.
Now in the world there are already at least 200 varieties of stablecoins, some of which are already in circulation, and the rest are under development. Two currencies pegged to the US dollar, Paxos Standard (PAX) and Gemini Dollar (GUSD), are already approved and regulated by the NYS Department of Financial Services.
At the end of 2020, the total value of stablecoins increased by 300% compared to last year and exceeded $ 20 billion. traditional currencies (US dollar or euro).
What are stablecoins
There are 180 UN-recognized currencies in the world. They are used to buy goods and services and, despite exchange rate fluctuations, inflation and other factors, are generally stable. Thus, countries can use them for calculations.
Stablecoins are digital money with the properties of fiat (traditional) currencies. As a rule, they are pegged to the dollar or euro exchange rate (usually in a 1: 1 ratio), gold or other assets, including cryptocurrencies.
Why to use stablecoins?
Their value is not as volatile as other digital coins. Many people do not consider cryptocurrencies to be a reliable means of payment. In 2014, Microsoft was the first to start accepting payments in bitcoins. But already in 2018, their reception was temporarily suspended due to price volatility.
The gaming platform Steam did the same.
Now a number of companies from Overstock to Shopify are starting to accept bitcoins, but they are still far from widespread.
2.Convert bitcoins to stablecoins in case of a market crash
Initially, cryptocurrency holders used stablecoins to save money in the event of a market crash. If bitcoins became cheaper, they could be converted in just a few minutes and avoid losses. Without stablecoins, bitcoins would have to be converted into traditional currencies. Such transactions are not possible on every platform, and a significant commission is charged for them.
3.Fast and secure international payments
Stablecoins are useful when you need to make fast and secure international payments.
A decentralized, reliable and stable system will have many uses, from cross-border lending to financial planning.
What are the types of stablecoins?
1) Stablecoins backed by fiat currencies
Example: The most common stablecoin of this type is Tether (USDT). It is the third largest cryptocurrency by market capitalization, with a daily trading volume higher than that of any cryptocurrency, even bitcoin.
USD Coin (USDC) is also pegged to the US dollar and is gradually gaining market share. In January 2021, it reached 15%.
Are there stablecoins pegged to other currencies?
There are stablecoins backed by other fiat currencies: XSGD (Singapore dollar), EURS (Euro) and even Candy (Mongolian tugrik).
2) Stablecoins backed by commodity markets
The value of these stablecoins is backed by assets, such as precious metals, most often gold, as well as oil or real estate.
Digix Gold (DGX) is an ERC-20 token powered by Ethereum. It is backed by gold: 1 DGX represents 1 gram of metal. Its gold reserves are held in Singapore and audited every 3 months. DGX owners can even exchange currency for real bullion – all they need to do is travel to Singapore.
Tiberius Coin (TCX) is tied to a combination of 7 precious metals that are used in the manufacture of high-tech equipment. TCX is expected to rise in value as solar panels and electric vehicles become more popular.
SwissRealCoin (SRC) is backed by a portfolio of properties located in Switzerland. Stablecoin holders can choose investment objects by voting.
3.Stablecoins backed by cryptocurrencies
Such stablecoins are backed by digital currencies, which helps them to be more decentralized because all transactions take place through the blockchain.
Operations in such stablecoins are safer and more transparent. They are often tied to several cryptocurrencies at once in order to spread the risks. Moreover, this is one of the most complex, and therefore the least popular groups of cryptocurrencies.
Example: Dai, face value is maintained at the dollar level, but is actually backed by Ethereum.
Algorithmic stablecoins are not pegged to fiat or cryptocurrency. Instead, price stability is achieved solely by algorithms and smart contracts that manage the delivery of the token issue. From a functional point of view, their monetary policy has in common with the management of national currencies represented by central banks.
We live in an era of the growing trend of digital currencies. While stablecoins have some drawbacks, they are a critical component of the cryptocurrency market. Thanks to various mechanisms, they can keep a fixed price. Share your opinion in the comments below! I would be happy to answer any questions or submit your project to my team at Astorts Group for evaluation.
Alessandro Rocco Pietrocola is an entrepreneur and investor based in London and operating mainly in Europe, Asia and Oceania with main focus on UK, Baltic Countries, Russia, China, Hong Kong, Malaysia, Singapore, Middle East and New Zealand as area of interest! At the moment is the CEO of Astorts Group. He is an UK FCA (Financial Conduct Authority) Approved Person and is has great experience as director of regulated companies. He uses to dedicate part of his life to inspire others and help them achieve the most out of their life. Since he was 20, he had successfully founded and managed several companies operating in the field of management consulting, wealth management and fintech. He loves travelling, he is a cigars lover, an amateur golfer and a dapper man.