What are Stablecoins?

If you have spent any time researching cryptocurrencies, then you may have come across the term stablecoin. This word can cause some confusion for those new to cryptocurrencies. A commonly asked question is “Are stablecoins and cryptocurrencies the same thing?” The short answer is, stablecoins are closely related to crypto coins, but there are some key differences. This article will look at what exactly they are. We will also discuss why stablecoins are worth buying.

What are stablecoins?

Stablecoins are a type of cryptocurrency that tries to avoid the volatility of the crypto market. To achieve this, stablecoins attach themselves to real world assets, like currency (the Canadian Dollar), gold, silver, oil, and other commodities. The assets are held in reserve as collateral. The collateral acts as proof that the coin is pegged to an asset. Otherwise, users would distrust the stablecoin and its price would fall. As the stablecoin owner spends their token, an equal amount is withdrawn from the asset reserve. Because stablecoins are tied to a traditional asset, their value should remain the same. For example, a stablecoin worth one U.S. dollar should maintain that price regardless.

Since they are pegged to real life assets, stablecoins act like the common currencies used by people on a daily basis. Financial experts view stablecoins as the bridge between the volatile crypto market and stable traditional assets. They have the decentralized nature and security of cryptocurrencies while having the stability traditional currencies.

There are three types of stablecoins:

  • Fiat-collateralized: These are stablecoins tied to real world currencies, like the U.S. or Canadian dollar. Other commodities like gold and oil can also be used as collateral for a stablecoin. Fiat-collateralized stable coins are regulated by independent third parties to ensure compliance.
  • Crypto-collateralized: These stablecoins are backed by a cryptocurrency. Since cryptocurrencies are highly volatile, a large amount of crypto coins are held in reserve. Crypto-collateralized stablecoins use the blockchain to establish the serves. This means there is no governing body regulating the stablecoin.
  • Non-collateralized: These stable coins have no asset reserves. Instead, they use a working mechanism to maintain a stable price. For example, Basecoin uses a consensus mechanism to increase or decrease the supply of the coin as needed. This mechanism acts like a central bank printing off bank notes to maintain a currency’s value.

The top stablecoins by market capitalization. Source: CoinMarketCap

A popular stablecoin is Tether, the first one ever created. Tether has become the largest and most popular stablecoin on the market. Tether is pegged to the U.S. dollar along worth other assets like short-term deposits and commercial paper. Currently, the price for one Tether coin is $1.26 CAD (Canadian dollar). USD Coin is another popular stablecoin attached to the U.S. dollar. At the moment, one USD Coin is also worth 1.26 CAD. The price of each coin has not fluctuated greatly, only by a few cents.

Why are stablecoins worth it?

Overall, stablecoins are worth the purchase because of their effectiveness as a currency. Cryptocurrencies like Bitcoin do not function well as an everyday currency because their market value fluctuates greatly, sometimes by thousands of dollars in a single day. Since stablecoins are far less volatile, they work much better as an everyday currency.

This graph demonstrates that stability of Tether’s price. Source: Binance.

Stablecoins are useful when trading for cryptocurrencies. Overall, the trading process can be difficult, no matter which payment method or buying platform you use. Some exchanges do not let you buy a cryptocurrency with other crypto coins. Other times, converting two separate cryptocurrencies will take a long time and you will have to pay a separate fee. If you use traditional money to buy crypto, you may also deal with long transaction times and expensive exchange fees. Your bank may even block transfers to cryptocurrency exchanges  or charge additional fees. With a stablecoin, transactions are much faster and most times you do not have to pay any fees.

How to buy stableocins

Buying stablecoins is the same as buying other cryptocurrencies. To start, you will need a crypto wallet. You will have choice between a hardware or digital wallet. We recommend you go with a hardware wallet because they are more secure than digital wallets. Next, decide where you want to buy stablecoins. Cryptocurrency exchanges like Binance or Coinbase are common places to buy stablecoins.  Peer-to-Peer networks let you trade directly with another person for stablecoins. Once, you have picked a buying platform, you can start buying a stablecoin. Most sites accept traditional currencies as payment. Other sites let you use other cryptocurrencies to make purchases. Once your transaction has gone through, transfer the coins to your crypto wallet.

Frequently asked questions about stablecoins

How many stablecoins are there?

According to 101 Blockchains, there were almost 200 stablecoins on the crypto market in 2021. This shows that the stablecoin market is healthy, diverse, and expanding. Out of this large pool, Tether, USD Coin, Binance USD, and TerraUSD rank as the most valuable stablecoins based on market capitalization.

Are stable coins safe?

Overall, stablecoins are safe. They are run on a blockchain, which is a digital ledger that stores and records transactions. Because blockchain is difficult to hack, stablecoin is safe from thefts. However, the stability of stablecoins has come into question. The concern is that some stable coins might not be fully backed by real life asset, despite their claims otherwise.  Another concern is that some stablecoins will be unable to maintain their attachment to currencies and other commodities.

If these concerns play out, then the value of those stablecoins will be more volatile. This poses a serious risk for owners of those stablecoins; they could lose money if the value of stablecoins plummet. To combat these two issues, governments or financial institutions can audit or impose regulations on stablecoins. Doing so will seriously affect the price of stablecoins.

Are stablecoins a good investment?

Since stablecoins are commonly used as a currency, they do not make the best investment option. The stability of the coins means there is hardly any room for growth, which means a lower chance of earning a profit from your investment. Stablecoins are best suited for transactions and converting real currencies to crypto and vice versa.

What is an altcoin?

You may have seen the term altcoin pop up when researching stablecoins. So, what are they? Altcoins are all cryptocurrencies other than Bitcoin. They share similarities with Bitcoin but have their own characteristics. For example, Bitcoin uses the proof of work mechanism to create bocks and confirm new transactions. Some altcoins, like Ethereum, use proof of stake, which is a more efficient and eco friendlier.

Altcoins come in several different categories. Stablecoins are one of them. The other categories are:

  • Mining-based coins: These are cryptocurrencies that are created through the mining process. Some common mined altcoins include Litecoin, Monero and Ripple’s XRP.
  • Security tokens: These are devices used to confirm a person’s identity digitally by storing a piece of personal identification. The user enters the security token into a system to gain access to a network service. Security token can come in hardware forms like USB sticks, or they can be digital like virtual coins.
  • Meme coins: Meme coins are the comedy relief of the crypto market. They are often based on online jokes and serve as a parody of cryptocurrencies. The most famous example of a meme coins is Dogecoin. This cryptocurrency was inspired by the popular Doge meme. Shiba Inu is another popular meme coin; it is seen as Dogecoin’s rival.
  • Utility tokens: According to Investopedia, utility token are used to buy services, pay network fees, or redeem rewards within a network. A commonly used utility coin is Filecoin; it is used to buy storage space on a network.

For more information on stablecoins, check out this video by 99Bitcoins:

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Updated date

April 7th, 2022

About the author

Nicholas Mah

Nick Mah is a writer who enjoys writing about music, movies, sports, and cooking related topics. He also enjoys reading and writing about history. In his spare time, he enjoys watching movies, reading a good book, going for long bike rides, listening to music, or playing his guitar.
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