Many people in the cryptosphere prefer to hold some of their assets as stablecoins because the value of a stablecoin is typically pegged to the value of a country’s national fiat currency. This means that the general value of a stablecoin is found in the value of the underlying asset.

In terms of the USD-backed stablecoin (USDT or USDC), this will mean that a token of a stablecoin is directly linked to the United States dollar.

What Exactly is a Stablecoin?

The Future Of Stablecoins

Stablecoins have actually been around for some time and there is a wide variety of them, including UST, DAI, USDT, and the USDC.

While each one of these will have slightly various properties, the general purpose of a stablecoin is the ability to allow investors the flexibility of moving through several cryptocurrencies without the need to convert back to a fiat currency.

Stablecoins were designed for transactions to be completed quickly across borders, without any need for conversion into secondary currencies.

The use case for stablecoins comes from the overall volatility of cryptocurrency prices. As any seasoned crypto sphere veteran will know, there can sometimes be huge irregular fluctuations in cryptocurrency prices. Have you ever heard the saying, that yesterday’s price is not today’s price? Well, this is common in the world of cryptocurrency with triple-digit percentage increases or decreases in prices being a common occurrence. For example, over a two-year period between 2020 and 2022, bitcoin’s price fluctuated wildly, rising from $4000 to almost $70,000.

How Does the Stablecoin Vary from Other Crypto Currencies?

A stablecoin is a valid form of cryptocurrency. However, unlike many of the other cryptocurrencies in the market, the stablecoin’s value remains pegged at 1:1 to its underlying asset.

Stablecoins were not designed to be speculative, and they have no other purpose other than to be used as a pegged token to a fiat currency.

Understanding How Stablecoin Works

Let us use USDC as an example. In the most basic form, the general stability of the USDC is based on the promise that 1 USDC will always equal 1 USD. This is why stablecoins are particularly useful within the highly volatile world of cryptocurrency.

The types of price swings that take place in the fast-paced world of cryptocurrencies create huge amounts of speculation. With this in mind, if a specific cryptocurrency were to increase in value and an investor’s assets significantly increased in value, it is best that the investor move out of the cryptocurrency and into a stablecoin and simply wait for the price of the asset to correct itself.

Why Stablecoin Is So Vital

With stablecoins, you have an almost perfect financial instrument that has the ability to bridge fiat currency to cryptocurrency. However, it is essential that the value of the stablecoin is pegged to a strong underlying asset.

This is known as assets backing stablecoins. If this is not done properly, you’ll be exposed to extreme risk and this is a challenge many people face with stablecoins.

Why Investors Find Stablecoin So Attractive

The implementation of the stablecoin as a particular method of payment has grown in popularity, as it features a number of advantages over conventional payment methods.

Individuals no longer have to worry about the loss of money due to the possible collapse of the bank, similar to that of the 2008 financial crisis.

The stablecoin is unable to be controlled by financial institutions and the government, as the holder is effectively their own bank. However, it is important to understand that a number of governments have begun to investigate the use of digital currency, including that of stablecoins. Many within the government believe this would be a viable way of upgrading or replacing the current monetary system.

The stablecoin has become the preferred method of cross-border payment due to the fact that it is fast and inexpensive. Additionally it is not subjected to cash controls, which are often imposed by many governments.

It has become increasingly common to use stablecoins to provide liquidity to earn rewards, as investors are finding they get a better ROI as opposed to the traditional fixed deposit.

Problems With The Stablecoin

One of the reasons that stablecoin has been somewhat problematic is the fact that tokens must be backed by a specific asset within the real world, such as gold or a national currency.

However, some of the top stablecoins have been unable to prove that they have sufficient cash reserves or asset-backed gains. This poses a potential risk for the user.

One such highlighted case involved a stablecoin known as tether, which once paid a $41 million settlement due to the company being unable to provide collateral for well over 70% of their tokens.

Additionally, there are a number of stablecoins that have been issued through private companies without a central government in control, which are known as stablecoin issuers.

This shows a possible lack of accountability and transparency to the overall community that use these particular assets. This is actually a vital aspect to a large community within the crypto world.

How to Buy and Store Stablecoins

When considering buying and using stablecoins, it is possible to use an exchange such as Okex, Binance, Hibtc or a Decentralized Exchange such as Sushiswap or Uniswap.

When you buy from an exchange, it is going to appear within your exchange wallet, which can then be transferred to an off-exchange wallet. This is actually recommended for your own personal security.

There are other platforms like Wirex and MoonPay that allow you to purchase stablecoins directly from your bank with the use of a debit card or credit card.

Join the Decentra Decoded Community and the conversation on Stablecoins and learn how to use stablecoins to preserve your gains.