If you've been watching the bitcoin trading scene for the past couple of years, you've most likely heard of the word "stablecoins." The trend of developing this form of cryptocurrency appears to be on the increase recently, and several experts agree that they do appear to be a move forward in crypto research.
So, what exactly are stablecoins? What's more important, what are they for?
Stablecoins
To comprehend stablecoins, we must first discuss volatility, which is something you must become familiar with when trading. Volatility is a term that describes how an asset's price changes over time. The US dollar, for example, is known to be almost non-volatile. As a result, the value of a dollar will remain stable for a long time.
Bitcoin and many other altcoins, on the other hand, have virtually become synonymous with being volatile properties. You may have noted that the price of BTC fluctuates on a regular basis. In reality, the value of Bitcoin fluctuates a lot, which is something that many investors try and avoid. Simply put, the price of Bitcoin does not seem to be stable.
So, how do stablecoins fit into the picture? They are cryptocurrencies in essence, but their prices do not fluctuate as much as those of many other cryptocurrencies. Is it really possible? What is the key to keeping crypto currencies stable?
Its worth is pegged to a more stable asset.
This easy but successful trick was pulled off by crypto professionals today. Stablecoins were created by combining the technology that underpins cryptocurrencies with some classic financial tricks they had up their sleeves.
In essence, the value of each stablecoin is the same as the asset to which it is linked. As a result, there's less space for market volatility, which means crypto enthusiasts won't have to worry about losing half their money in the event of a price drop. So, what are the key characteristics of stablecoins?
Stablecoins are currently available in three versions.
Asset-backed stablecoins
Asset-backed stablecoins are the ones we've been discussing so far. It simply implies that the value of a coin is linked to a real-world commodity. One of the most common examples is commodities. There are currently coins like DGX that are pegged to the value of gold. As an investor, you would essentially be able to invest in gold by purchasing its tokenized form. Purchasing one DGX is equivalent to purchasing one gram of gold.
Crypto-collateralized Stablecoin
Cryptocurrency-collateralized stablecoins are the second most common form of stablecoin. This form of coin is essentially reliant on other cryptos, which are referred to as collateral in this case. They're used to make a stablecoin's volatility as low as possible. DAI is one of the most common examples right now, with a smart contract that buys and sells collateral cryptos like Ethereum and Maker to smooth out its price.
Non-collateralized Stablecoin
This form of stablecoin does not have collateral, as the name implies. Instead, it uses sophisticated algorithms to ensure that their value stays relatively constant over time. While this form of cryptocurrency is still in its early stages, some projects, such as Ampleforth, are already investigating non-collateralized stablecoins.
The Usefulness of Stablecoins
Stablecoins, like any other cryptocurrency (or currency for that matter), are intended to be a form of asset that can be used to make payments. In the same way that BTC or dollars are. However, even BTC is still struggling to gain widespread acceptance, so stablecoins aren't a viable choice at this time.
Stablecoins, including Bitcoin and other cryptocurrencies, can be exchanged and invested in in addition to being used for payments. All you have to do now is locate an online cryptocurrency exchange that accepts this coin and begin trading. Most exchanges would most likely allow you to swap it for BTC or buy it with BTC. Some exchanges, on the other hand, can allow additional trading pairs that include fiat currencies.
On a short-term basis, hodling can not make sense with stablecoins. Overnight variations are not probable because their price is stable. As a result, buying $1,000 worth of stablecoins and profiting thousands if their price rises dramatically is not a viable choice. However, if enough people invest and there is enough buzz about them, the price can rise steadily. Nonetheless, this is a mostly uncharted trading territory at this time.
Conclusion
So, what exactly is stablecoins stability, and is it worthwhile to investigate further? Yeah, they have been trending recently, and if you are interested in cryptocurrencies, this is likely to be right up your lane. Cryptocurrencies are fresh, and to be frank, they are still in their infancy.
While stablecoins seem to be a great concept, they are not as well-known as the more common cryptocurrencies. Many of the technologies that surround cryptocurrencies are still in their infancy. As a result, crypto enthusiasts are just scratching the surface of the potential, and stablecoins are currently one of the most important outcomes of that study.
