What are stablecoins?
Cryptocurrencies are extremely volatile assets, which is why they are primarily of interest to potential investors as exchange instruments for trading. However, it is legally challenging for exchanges to launch cryptocurrency trading pairs with fiat currencies because it requires obtaining an extended broker license in most countries. This is why there was a need to create cryptocurrencies whose value would be tied to the price of a specific asset. Thus, stablecoins emerged. Their main task is to simplify exchange trading.
Are stablecoins cryptocurrencies?
Technically, stablecoins are cryptocurrency tokens with a blockchain and a decentralized network. However, their value is pegged to a real asset, which can be:
So, the fundamental differences are as follows:
- specific currencies (dollar, euro);
- securities (stocks of various companies);
- non-financial assets (oil, gold, silver).
So, the fundamental differences are as follows:
- for cryptocurrencies, the price is not tied to assets, it depends only on demand, supply, and total emission;
- for stablecoins, the price is tied to a specific asset, and emission is possible only through its exchange by the issuer (the company that issues the coin).
Is the value of stablecoins guaranteed?
It is necessary to understand that stablecoins are issued by a specific company. Its task is to conduct emission and ensure that the exchange rate of their token closely matches the value of the asset to which they are pegged. Dollar is often used for this purpose, thus simplifying exchange calculations. Launching stablecoins allows cryptocurrency exchanges to completely abandon the use of fiat currency pairs.
So, the fundamental differences are as follows:
So, the fundamental differences are as follows:
- for cryptocurrencies, the price is not tied to assets, it depends only on demand, supply, and total emission;
- for stablecoins, the price is tied to a specific asset, and emission is possible only through its exchange by the issuer (the company that issues the coin).
Have there been similar cases in history when the price of such a cryptocurrency significantly dropped? A vivid example is the Terra USD project. The company issued the UST stablecoin, pegged to the dollar exchange rate. But due to the hack of their blockchain, the token's value plummeted instantly, as the attacker gained the ability to issue coins for themselves in unlimited quantities. And if someone managed to do it, then anyone else could too. Consequently, demand for the tokens sharply declined, while there was suddenly an excessive supply for sale, which triggered a sharp drop in asset value.
However, it is important to note that companies issuing stablecoins constantly upgrade their blockchain algorithm, providing the most advanced technologies to protect against potential hacks. This is of interest to major investors, who invest tens and hundreds of millions of dollars in network development. Therefore, the risk of depreciation for the most popular stablecoins is relatively low. Especially if the issuer regularly confirms the presence of assets to which the token's value is linked.
However, it is important to note that companies issuing stablecoins constantly upgrade their blockchain algorithm, providing the most advanced technologies to protect against potential hacks. This is of interest to major investors, who invest tens and hundreds of millions of dollars in network development. Therefore, the risk of depreciation for the most popular stablecoins is relatively low. Especially if the issuer regularly confirms the presence of assets to which the token's value is linked.
The most popular stablecoins:
As of 2024, the most popular stablecoins in the cryptocurrency market are:
Analysts believe that in the future, many countries will start issuing their own "government" stablecoins, pegging their value to the national currency. Even in Russia, plans are already known to launch a "digital ruble" in the form of a cryptocurrency token. Essentially, this will also be a stablecoin. But the issuer also regulates emission and sales rules. So, it is quite possible that only banks will be able to purchase them.
- Tether USD (USDT). The market capitalization is about $98 billion. The issuer is the company Tether. It predominantly holds assets in US bonds.
- Coinbase USD (USDC). The market capitalization is about $28.5 billion. The issuer is the cryptocurrency exchange Coinbase. The distinctive feature is that Coinbase has a license to operate in the financial market of the United States, where some of the strictest rules for selling and issuing securities apply.
- Maker Protocol USD (DAI). The market capitalization is around $5 billion. The issuer is a Chinese company where the cryptocurrency market is one of the most developed.
- First Digital USD (FDUSD). The market capitalization is around $3.3 billion.
- PayPal USD (PYUSD). The market capitalization is unknown. The issuer is PayPal.
Analysts believe that in the future, many countries will start issuing their own "government" stablecoins, pegging their value to the national currency. Even in Russia, plans are already known to launch a "digital ruble" in the form of a cryptocurrency token. Essentially, this will also be a stablecoin. But the issuer also regulates emission and sales rules. So, it is quite possible that only banks will be able to purchase them.
How to store stablecoins?
Stablecoins can be stored in the following ways:
- On a cryptocurrency exchange account: Register, undergo verification, and exchange fiat assets for stablecoins like USDT. Many exchanges also offer peer-to-peer purchases where the platform acts as a guarantor.
- On a "hot" wallet: There are numerous options available today such as Trust Wallet, Coinbase Wallet, MetaMask, and many others. Their main advantage is that no personal verification is required, and the creation of the wallet is anonymous. Access to the funds will be available only to the owner.
- On a "cold" wallet: The most popular option is hardware wallets. This option is more suitable for those who purchase stablecoins in large volumes and plan to store them for an extended period.
How to purchase stablecoins:
The simplest ways to purchase stablecoins are as follows:
- Buy them from individuals: Not the most reliable option, especially for those who have never dealt with cryptocurrencies before.
- Purchase through an exchange: Convenient, relatively advantageous exchange rates, but KYC verification is mandatory for most such platforms. There are also decentralized exchanges where purchases can be made anonymously, but they are more suitable for experienced users. Additionally, the transaction fees (for gas fees) are quite high.
- Purchase from companies specializing in the exchange of stablecoins and other cryptocurrencies. GeCrypto is one such example. It offers a good exchange rate and instant exchange, suitable for everyone, including those who have never dealt with cryptocurrencies before.
Advantages and disadvantages:
Stablecoins have numerous advantages, including:
Among the disadvantages are:
- Almost unlimited issuance, allowing anyone to purchase digital tokens in any volume.
- Low volatility and high resistance to potential manipulation of the exchange rate.
- They can be used to purchase other cryptocurrency assets and fiat currencies in almost any country worldwide.
- No bank account is required for storing the token, and it can be done anonymously.
- There are no restrictions on the number or volume of transactions (although financial regulators are currently developing a scheme to track the movement of such assets for counter-terrorism purposes).
Among the disadvantages are:
- There are always non-trading risks of devaluation (chain hacks).
- The issuer theoretically has the ability to manipulate the exchange rate at their discretion, which could lead to the loss of assets for the investor.
- Due to the low volatility, the value of stablecoins does not increase over time like gold or oil.
How stablecoins can be used?
Buyers of stablecoins can be found everywhere. Therefore, no matter which country an investor is in, they can always exchange their digital tokens for local currency or dollars. Cash or transfers to an open bank account can be obtained. Additionally, stablecoins can be used for earning through "staking." This option is currently utilized by cryptocurrency exchanges. For example, by staking USDT, one can guaranteeably receive an average annual return of 1.5 to 10%. This is more than what most banks offer for currency deposits (in dollars, euros).
However, the main advantages of stablecoins are the ability to quickly transfer assets. Processing such a transaction takes minimal time (an average confirmation time of 2-3 minutes). The fee is very low (for example, the average fee for transferring USDT is only $1, regardless of the transfer amount). There is also currently increased interest in stablecoins from citizens of countries whose national currency has high volatility due to inflationary losses. Purchasing USDT, for example, allows individuals to protect their own savings from devaluation.
In summary, stablecoins are a type of cryptocurrency whose value is tied to a real asset, most often fiat currencies such as dollars. This is why they are often mistakenly referred to as "digital dollars," although this is not entirely correct. For potential investors, it is important to know that anyone can purchase stablecoins. There are currently no difficulties in exchanging them for fiat, regardless of location. The safest way to store these tokens is on hot and cold wallets.
However, the main advantages of stablecoins are the ability to quickly transfer assets. Processing such a transaction takes minimal time (an average confirmation time of 2-3 minutes). The fee is very low (for example, the average fee for transferring USDT is only $1, regardless of the transfer amount). There is also currently increased interest in stablecoins from citizens of countries whose national currency has high volatility due to inflationary losses. Purchasing USDT, for example, allows individuals to protect their own savings from devaluation.
In summary, stablecoins are a type of cryptocurrency whose value is tied to a real asset, most often fiat currencies such as dollars. This is why they are often mistakenly referred to as "digital dollars," although this is not entirely correct. For potential investors, it is important to know that anyone can purchase stablecoins. There are currently no difficulties in exchanging them for fiat, regardless of location. The safest way to store these tokens is on hot and cold wallets.
