Stablecoins – What Are They and How Do They Work :
In the volatile world of digital currencies like crypto, the word “stable” is probably not a familiar concept, as prices are likely to move dramatically up or down depending on several factors. Stablecoins aim to maintain a constant value in a bid to offer crypto investors something of a haven from the regular price fluctuations of cryptocurrencies like Bitcoin and other tokens.
What is a Stablecoin?
Stablecoins are a cryptocurrency type that aims to maintain a stable value, typically by pegging their value to that of a fiat currency, most often the US dollar, or other assets such as gold. The basic idea behind stablecoins is to provide a cryptocurrency that is less volatile than traditional cryptocurrencies like Bitcoin, which is prone to experiencing significant price fluctuations. Stablecoins offer the privacy, security, and convenience of crypto while also offering the stability and durability of regular money.
In 2009, Bitcoin, the world’s first known cryptocurrency, was launched as the first decentralized digital currency that used a technology called blockchain to record transactions and store value. Since then, thousands of other crypto have been created, with the crypto market exceeding a global market cap of $1 trillion. However, because cryptocurrencies have yet to be universally adopted and are still facing many regulations and opposition, the price of crypto is always prone to changes and fluctuations. Stablecoins act as a bridge between the traditional financial system and the crypto world, making it easier for people to move between the two systems and leverage the benefits of each.
How do stablecoins work?
Stablecoins, in essence, allow crypto traders to buy tokens like Tether (USDT) or Binance with actual US dollars. The tokens purchased can then be used to trade bitcoins and other cryptocurrencies. A trader can always get the exact equivalent amount of dollars for whatever amount of stablecoin they want to redeem whenever they choose to cash in.
Transferring from fiat currencies like US dollars into cryptos can be a bit of a hassle, as it comes with extra costs and takes considerable time. Stablecoins solve that problem by allowing traders to transfer an amount of cryptocurrency into an equivalent number of tokens, and then those tokens can be conveniently traded whenever need be.
The main advantage of stablecoins is their price stability. Because they are pegged to a fiat currency or other asset, they are less volatile than traditional cryptocurrencies like Bitcoin, which can experience significant price fluctuations. This makes stablecoins more practical for use in commerce and payments.
Stablecoins are basically like a cryptocurrency savings account. Suppose you want to use crypto technology to store your money but don’t want your investment to be at the risk of constant price fluctuations typical of cryptocurrencies. In that case, you can always use a trusted stablecoin, as they are typically backed by reserves of assets, which makes them more trustworthy than other forms of cryptocurrency which are not supported by any assets. Stablecoins can make it easier for people to access the benefits of cryptocurrency, as they are less risky and more predictable than traditional cryptocurrencies.