Crypto’s immense potential has drawn many to the space, intrigued by the prospects of reaping large returns on investment. Enthusiasts have enjoyed watching Bitcoin and various other altcoins rise in value, bolstered by the growth of decentralized finance and turbulent global economics.
Others, however, are wary of the volatility and price fluctuations seen in the cryptocurrency world. Since coins like Bitcoin have no hard backing, unlike silver-backed crypto, they could theoretically drop in value to zero and often experience wild price swings in response to certain events.
Cautious investors often wonder what type of virtual currencies, if any, offer relative stability and can keep a portfolio safe from wild price turbulence. Keep reading to learn more about a type of digital currency called stablecoins and how they remain the most consistent on the market.
Stablecoins: Offering Investors Opportunities To Protect Against Volatility
Many view stablecoins as a ‘middle road’ for those caught between traditional fiat and the ever-growing crypto world. Since stablecoins are cryptocurrencies backed by a hard asset, like precious metals, diamonds, or fiat currencies, they come with a built-in price floor. As a result, they are free from the dramatic price swings other virtual currencies experience while still giving investors an opportunity to diversify into the cryptocurrency world.
Stablecoins have been heralded as a good on-ramp for those new to the cryptocurrency world since investment does not run the risk of losing large amounts of money if the market dips. Stablecoins have exploded in popularity in the DeFi sector and in cross-border finance as people rely on them to send and receive money from family and friends.
Nations like Russia, Estonia, Switzerland, and Venezuela have all proposed or are working on a national stablecoin, through many regard Venezuela’s efforts with the Petro stablecoin to simply circumvent sanctions from the United States.
Fiat-backed stablecoins pegged to currencies like the U.S. Dollar or Euro often attract the most attention. Coins like Tether are heavily traded, and fiat-backed options still make up the vast majority of the stablecoin market. These types of stablecoins maintain reserves stored and audited by independent custodians. Transparency is essential with fiat-backed coins as revelations that a cryptocurrency does not have proper backing with hard currency could send the coin crashing in value.
Some stablecoins are backed by assets like real estate, gold, or silver. Precious metal-backed stablecoins are of particular interest to people eager to hedge against inflation, as bullion has long been desired and admired for its stability.
Crypto-collateralized coins are another stablecoin category popular with investors. These are backed by a basket of other virtual currencies and are usually over collateralized to mitigate volatility. Crypto-collateralized options like MakerDAO’s DAI often have additional measures in place to monitor the coin and assure holders the coin remains price static.
Non-collateralized stablecoins do not rely on an asset like fiat currency, bullion, or other virtual currencies. Instead, they incorporate a working mechanism like smart contracts to automatically increase and decrease supply as needed.
Basis remains one of the more well-known non-collateralized stablecoins despite having shut down in 2018 due to regulatory concerns. The crypto’s ICO netted more than $100 million. Ampleforth’s AMPL token is one current example of a non-collateralized stablecoin, relying on algorithms to adjust coin supply each day.
Non-collateralized stablecoins are currently the most decentralized and independent, as there is no central authority managing the coin or handling reserve assets. However, this type of stablecoin needs continuous growth to be successful as a price crash opens up a scenario where there would be no collateral to liquidate the cryptocurrency back into.
Using Stablecoins To Keep Assets Secure
Cryptocurrencies backed by assets remain the most stable virtual currency option on the market. Stablecoins reap the benefits of being a cryptocurrency, which includes transparency, low transaction fees, and utilizing the blockchain’s immutability while avoiding much of the volatility that plagues traditional crypto.
Currently, more than 200 stablecoins have been released in the market or are currently in development. Paxos Standard (PAX) and the Gemini Dollar (GUSD) have received approval from the New York State Department of Financial Services – lending a sense of legitimacy in mainstream financial circles to stablecoins. Governments and other economic entities continue to research the impact of stablecoins and how they can be used in mainstream finance.