Bitcoin, Ethereum and other cryptocurrencies have changed the way many people invest. However, several of these coins often experience dramatic price fluctuations in a single day, causing many investors to seek ways to minimize their risk. Against this backdrop, Stablecoins have gained popularity as a way to counteract the volatility of the cryptocurrency markets. Cryptocurrencies are volatile by nature but with great risk comes great reward. If you’ve ever tried online sites that offer casino bonuses, such as comparison platforms like oddschecker, then you know what we’re talking about.
No matter how much research you do, it’s almost impossible to predict the outcome. However, you can manage the risk of investing in cryptocurrencies by adding stablecoins to your portfolio.
What Are Stablecoins?
Stablecoins are a type of digital currency tied to stable assets such as the US dollar or gold. Fiat-backed (government-backed), cryptocurrency-backed, and commodity-backed are the most common types of stablecoins available. Often pegged to a fiat currency, they’re designed to maintain their value.
Cryptocurrencies’ dramatic price fluctuations make them difficult for everyday people to use because it’s almost impossible to know how much they’ll be worth from one moment to the next. In contrast, fiat money such as the US dollar or precious metals such as gold have stable prices. While the dollar’s value may change over time, it doesn’t experience the volatility of cryptocurrencies.
Being pegged to fiat currencies is what gives stablecoins their stability. The company behind a stablecoin creates a reserve to store the assets backing the stablecoin, for example, placing $5 million in a bank to back up $5 million worth of a stablecoin.
That’s the process for pegging stablecoins to real-world assets. So, when a stablecoin owner wants to cash out their investment, the fiat money is withdrawn from the reserve. Fiat-backed stablecoins are the most common but the process works similarly for cryptocurrency and commodity-backed stablecoins.
What Are the Most Popular Stablecoins?
The most popular stablecoins by market cap and volume are the following:
- Tether: The fifth-biggest digital coin globally based on market value, Tether has been around since 2014. A Tether coin is usually worth one dollar, although the price has changed occasionally.
- USD Coin: Launched in 2015 by Circle and cryptocurrency exchange Coinbase, USD is another digital currency pegged to the US dollar. A consortium of companies called “Centre” back the coin.
- Binance: Binance coin started in 2017 as a token for discounted trading fees on the Binance platform. Today it’s used on various platforms to make payments for entertainment, book travel accommodation, and pay for online services.
- DAI: Another stablecoin pegged to the US dollar, MakerDAO regulates its value to maintain its price stability. Introduced in 2017, it uses an automated smart contracts system on the Ethereum blockchain to keep its value as close to the US dollar as possible.
- UST: The newest coin on our list, UST, launched in September 2020. The scalable, yield-bearing coin is also pegged to the US dollar.
Why Invest in Stablecoins?
One of the biggest reasons for investing in stablecoins is that they don’t undergo the price fluctuations experienced by crypto coins that aren’t pegged to fiat currency or another asset. They’re an excellent option if you’re considering investing in a volatile coin such as Bitcoin.
If you see major movements in cryptocurrencies such as Bitcoin or Ethereum, you can quickly move your money to stablecoins while you wait for the market to stabilize. You can keep buying stablecoins with fiat money, knowing the value won’t change unless you move it to a Bitcoin or another cryptocurrency.
You can also use stablecoins across cryptocurrency exchanges. Their liquidity makes it easy to exchange them for other cryptocurrencies or fiat money. Trading cryptocurrencies for cash is difficult, and it often takes days to finalize a sell order. Stablecoins solve this problem. All you have to do is convert the cryptocurrency you want to sell to a stablecoin, and it’ll maintain its value.
Stablecoins are low-risk, making them a good option in a diversified portfolio. Although they’re designed to maintain their value, they may appreciate it over time. This is especially true for commodity-backed or cryptocurrency-backed stablecoins.
Make Money With Stablecoins
It may seem counterintuitive, but you can make money investing in stablecoins. The most common ways include lending stablecoins and earning interest on stable coins.
Crypto lending involves lending stablecoins or fiat money to others in exchange for interest payments. You can earn between 5% and 12% rate of return lending stablecoins. If you lend Tether, you’ll be paid back in Tether plus interest.
Earning Interest on Stablecoins
Another way to earn interest on stablecoins is by simply opening an account with a crypto exchange and accruing interest, much like you would with a money market account at a bank. If you invest in a stablecoin backed by gold or another precious metal, then if the price goes up, the value of your stablecoins will go up as well. Since fiat money is meant to hold its value, you won’t see stablecoins pegged to fiat currency increase in value.
Is There a Downside to Investing in Stablecoins?
While stablecoins are generally much safer than other cryptocurrencies, they’re not without risk. Although there are ways to make money with stablecoins, their prices don’t usually increase significantly. Thus, you may miss out on profits you could have made if you’d invested in more volatile, high-risk, high-reward coins.
Bitcoin is a stark example. If you’d invested $1,000 in Bitcoin five years ago, you’d have over $50,000 today. In contrast, $1000 invested in Tether would be worth about $1000 today. While stablecoins tend to hold their value, there’s always a risk the asset it’s linked to will decrease in value. If that happens, the value of your stable coins will fall too.
Finally, you need to confirm whether the stablecoin’s central authority has collateral claims. If it doesn’t, they may not have the money to pay you your money. Many central authorities don’t share information about their reserves. Tether is one example. It claimed each coin was backed by one US dollar. When the New York Attorney General investigated, Tether had to admit this wasn’t true.
Should I invest in Stablecoins?
Stablecoins can be a worthy investment if you want to add diversity to your cryptocurrency investments. You can use them to move money easily when there’s a lot of volatility in the cryptocurrency market. They can also make an excellent investment, although you won’t make as much money as you would with riskier investments. In the end, it’s all about balance. Investing in stablecoins can be an excellent way to balance your portfolio.