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What are Stablecoins? A Guide on Reserved Backed Currency

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In this ever-changing world that is quickly moving towards a digital economy, crypto has recently been all the craze. Cryptocurrency presents massive potential for exponential growth and for a change in the economy for investors who will take the time to learn about this area of finance. In addition, simply taking a few minutes out of your day to learn about crypto can yield significant returns long-term and help you better understand how crypto works and why many are investing in it. 

To learn more about some of the commonly asked questions about stablecoins and better understand the world of cryptocurrency, keep reading below!

What are Stablecoins?

This is a question that many newcomers to crypto ask themselves. In a nutshell, stablecoins are digital tokens designed to maintain a stable value relative to another asset, such as the US dollar or gold. Unlike other currencies, they are not as susceptible to volatility and wild fluctuations in price. This makes stablecoins a solid option for those who want to hold digital currency but avoid the risk associated with other crypto investing routes. 

This also means that stablecoins are a form of digital currency well suited for everything from transfers between exchanges to day-to-day commerce. Think of it as the equivalent of going into a Starbucks and paying with a $5 bill: everyone accepts it, it is standardized, and its worth does not fluctuate a lot. 

Stablecoins have gained popularity because they combined traditional-asset stability with the flexibility of digital assets. As a result, they have become popular and trustworthy ways to store and trade value in the digital currency ecosystem, and for a good reason.

How do Stablecoins Work?

Stablecoins can credit their stability to the underlying collateral they are backed with. For example, many of the most popular stablecoins are backed 1:1 by fiat currency. This fiat collateral remains in reserve with a central issuer or regulated financial institution and must stay proportional to the number of stablecoins in circulation at any given moment. 

On the more practical side, stablecoins are global, open, and accessible to anyone on the internet, 24/7. They are cheap, quick, and safe to transmit, making your transactions secure. Stablecoins are also programmable as well as digitally native to the internet. 

Stablecoins also allow individuals to transfer money and even send it internationally, with low fees, far lower than those of the traditional banking system. For example, people have been able to transfer as much as a million dollars worth of USDC with transfer fees of less than a dollar. This means that for transfer payments, you cut out the middleman of the bank that keeps some of your money and can retain more of your currency while it gets to where you want it to go. 

Can Stablecoins Crash and are they Safe?

Stablecoins are a safer investment option than other forms of cryptocurrency, especially during a crash and when the market is more volatile. After all, they are called stablecoins for a reason. Since the USDC is backed 1:1 by USD, when the crypto market crashes, the price stays pegged to $1. Of course, this does not mean that there will be no fluctuation in the price forever, but the price of stablecoins will not be affected much despite the crashes. 

The price of stablecoins tends to rise very slightly during crashes due to supply and demand. Therefore, when the crypto market is tanking, people are generally more willing to pay a slight premium to trade their rapidly crashing crypto for a more stable asset and unaffected by this same volatility. This is a slight variation, usually never much more than 2-5%, which is negligible compared to many other cryptocurrencies that can quickly lose upwards of half of their value in just a matter of hours.

Where to Buy Stablecoins?

Stablecoins can be bought on the most popular cryptocurrency exchanges. Make an account on an exchange like Coinbase, Crypto.com, or Trust Wallet. Then, make sure that you correctly set up your account and can purchase the currencies with either USD or another major cryptocurrency like Bitcoin or Ethereum. 

It is also an option to exchange Bitcoin or Ethereum for a stablecoin, so pick a way of purchasing stablecoins that works for you. When choosing a stablecoin, research the coin’s backing and evaluate its stability. You will also want to ensure that the exchange you are using is reputable and has good reviews. 

Which Stablecoin is Best?

While most stablecoins are relatively equal in how much their price fluctuates, it is essential to invest in well-known ones that have proved their functionality. 

One stablecoin you can not go wrong with is Tether (USDT), the first-ever stablecoin and the most well-known and largest stablecoin in the crypto market. Tether is easily the most widely-available stablecoin for investors to use and is currently available on 428 exchanges. 

Another reliable stablecoin to invest in is the USD Coin (USDC), the second-largest stablecoin by market cap, following Tether. It is available on nearly 300 exchanges, and the coin works alongside regulators and financial institutions to become safer and more available for investors. 

The third-largest coin by market cap is Binance USD (BUSD). Although it is less accessible than its competitors, only being available on 103 exchanges, BUSD offers investors the benefits of its native exchange, Binance. Another perk of BUSD is that it is one of only three stablecoins approved by Wall Street investors, and BUSD users gain access to zero-fee trading and conversion on Binance. They can also deposit their stablecoins into lending services for an APY of up to 15%! This means that simply letting your stablecoins sit can earn you money. 

Takeaways on Stablecoins

Hopefully, this article showed you the basics of stablecoins, and now you feel more confident in your understanding of this type of currency. As digital currency only becomes a more significant part of the world we live in and our knowledge of finance, it is crucial to stay informed of how these technologies work so they can benefit you. 

Disclaimer
All articles published on Coinmash are strictly for informational purposes only. Any action that is taken from reading content published on this website is done at your own risk. 

About the Author
James Satoshi
James Satoshi
James is a leader in Web3, NFTs, & DeFi. You'll spot him covering all topics through-out Coinmash - some say he's so good he doesn't even seem real.