What are Stablecoins and Should You Buy Them?
Stablecoins are a branch of crypto aimed at maximizing the safety of investments. Stablecoins are a great alternative to common cryptocurrencies such as Bitcoin, Ethereum, or Dogecoin. Stablecoins tend to have a much more stable value, so do your blood pressure a break and consider escaping the world of insane price fluctuations. If the idea of stablecoins sounds appealing to you… keep reading!
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Why Use Stablecoins?
People use stablecoins for a variety of reasons, the most prominent being eliminating risk. Since traditional cryptocurrencies tend to fluctuate in price often, this presents a major roadblock for crypto becoming the currency of the future. Since the price of a regular cryptocurrency could drop dramatically, businesses are reluctant to accept crypto as a form of payment. However with stablecoins, this issue is not as prevalent because their value is relatively constant. In addition, with regular cryptocurrencies, consumers are reluctant to pay with something that could potentially increase in value. Stablecoins eliminate this issue almost entirely. Not only are businesses more willing to accept stablecoins, but consumers are more likely to pay with stablecoins. This means stablecoins actually have a chance at becoming the currency of the future.
How Stablecoins Work
Stablecoins operate on much of the same technology as regular crypto. However there is one distinct difference between stablecoins and their traditional counterparts. A stablecoin acquires its value through being tied to a stable asset such as precious metals, other cryptocurrencies, or the fiat currency of a specific country. When a cryptocurrency is tied to an asset, it is considered “pegged”. Once a cryptocurrency has been pegged to an asset, it becomes a stablecoin. Simply put, the value of a stablecoin is tied directly to the value of another asset or collection of assets. When investing in stablecoins it’s important to take note of what asset(s) the coin is tied to. This can help investors decide which stablecoins are worth investing in.
Depending on what you’re looking for in stablecoins will determine which ones are worth investing in. For example if you want to invest in a stablecoin tied to the U.S dollar, you might consider investing in USD Coin. There are also stablecoins backed by the U.S dollar and Ethereum. This provides a mix of both worlds, introducing the stability of the U.S dollar, as well as the volatility of Ethereum.
Drawbacks of Stablecoins
Although it appears stablecoins have no inherent drawbacks, there are a few to be aware of. First, the price of a stablecoin will not increase drastically, if you’re looking for a way to generate a profit, stablecoins are not for you. This brings us to the next drawback of stablecoins, the value of stablecoins are directly pegged to specific real-world assets. This means the value of stablecoins can be influenced by major events such as the pandemic.
Should You Buy Stablecoins?
Your specific goals with crypto will ultimately determine how you choose to invest. If you’re looking to generate major profits from crypto, traditional coins such as Bitcoin or Ethereum would be a better choice. However if your goal is to transform money into its decentralized equivalent, stablecoins are a better option.
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