The volatility of cryptocurrencies like Bitcoin and Ethereum is well known to everybody who knows and trades on cryptocurrency exchange websites. Stable coins are digital currencies or tokens that have been created in response to the erratic price fluctuations of other blockchain assets. These are digital currencies or tokens that are intended to have a fixed value and trade at the same rate as conventionally stable assets like gold or fiat currencies like the US dollar.
Regular traders love these because their price is always the same, unlike other digital assets whose value might vary dramatically. For instance, a trader may sell an asset for a stable coin if they believe it will soon lose value in order to avoid suffering significant financial losses. Leading websites for crypto trading like bitcoinera-dk are promoting stable coins because of their massive help in stabilizing the market just enough to stop the traders from getting demotivated from cryptocurrencies.
Types of stable coins to know about
Stable coins are broadly classified into two different types which are as follows-
- Fiat-collateralized stable coins: As the name suggests, these are stable coins that are backed by fiat currencies, i.e., government-issued currencies for example Euro and Dollar. Tether, one of the first stable coins and currently the most widely used stable coin, is a well-known example. The Tether organization reserves one dollar for each Tether that is in use in order to maintain the stability of Tether and its $1 price.
- Crypto-collateralized stable coins: The crypto-collateralized stable coins are such coins that use cryptocurrencies as collateral. The most widely used stable coin today is Dai, which differs from initiatives like BitUSD in that user are not required to believe that a third party is maintaining adequate reserves. Dai is instead only produced when users spend Ethereum on a smart contract built on Ethereum.
There are also other types of stable coins which, like the majority of contemporary government-issued currencies, are backed by nothing or by commodities like gold. Such currencies and other non-collateralized stable coins are created and acquired to control prices.
Why stable coins are taking over the crypto world
Since they have the ability to safeguard the invested amount against massive price fluctuations, stable coins have proved themselves very useful for traders. Due to the following reasons, stable coins are useful:
- Investments are saved in the event of a massive price fall by buying stable coins instead.
- It helps in protecting personal wealth from losing its value.
- An entrepreneur would sell goods in exchange for cryptocurrency and then to prevent the currency from losing its value, they’d invest the amount in stable coins.
Risk factors associated with stable coins – Points to note
Although stable coins are pretty stable for a cryptocurrency, there are some risks that are to be considered with stable coins, some of these are:
- Although the price of stable coin although maintained most of the time, there still may be some fluctuations to be seen in the prices over long periods of time.
- Since stable coins themselves are dependent on other currencies or gold, when prices of these currencies or gold go down, stable coin suffers the loss too.
- There is always the risk of a discrepancy since the stable coin buyers are dependent on a third person’s integrity that they’ll keep a sufficient amount of collateral in place of the stable coins sold.
- Many large projects have been shut down in the past due to regulatory concerns leading to the invested amount zeroing out.
Conclusion
There is a lot of fluctuation in the prices of all the popular cryptocurrencies in the market lately and it has now become the main cause of demotivated traders and a heavy drop in the number of new traders joining the crypto market lately.
Luckily, stable coins are one important cryptocurrency that helps the traders cope with the fluctuating prices and shield them from heavy losses they might suffer if not for the currency-dependent cryptocurrency. The stable coins with their different types help all sorts of traders i.e., long-term or day traders with minimizing losses.
