Cryptocurrency is the future of money. Bitcoin is up there with the great inventions of our time, right next to the invention of paper money and the credit card. But even though it’s a revolutionary concept with limitless potential, it has a long way to go before we can start replacing fiat currencies with cryptocurrency and one day rid ourselves of central banks. That’s where stablecoins come in.
This guide will explain why stablecoins are crucial in today’s crypto markets, especially when you will buy cryptocurrency.
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Defining Stablecoins
Stablecoins are a relatively new cryptocurrency asset that are designed to provide stability in the cryptocurrency market. The idea behind them is to create a cryptocurrency whose value remains constant and does not fluctuate like other cryptocurrencies. They have been developed by several companies, including Tether (USDT) and MakerDAO (DAI).
The idea behind stablecoins is that a cryptocurrency’s value should not be affected by factors such as government regulations, oversupply of the market, or economic crises. This allows investors to hold on to their cryptocurrency assets without being concerned about losing value due to these factors.
However, there have been concerns raised about the reliability of stablecoins. In particular, it has been noted that Tether’s USDT tokens do not always trade at the promised $1 value and may instead trade at a price above $1 or below $1. Although this can be an issue for investors, it can also be beneficial in some cases because they can use stablecoins to hedge against other cryptocurrencies when they feel that prices may drop.
Take a look at some of the most popular types of stablecoins in the crypto space.
- The Fiat-Collateralized Stablecoins
Fiat-backed cryptocurrencies are pegged to the value of something else in the real world, like gold or the U.S. dollar. They’re also called “stablecoins,” because they don’t fluctuate in value. The most well-known stablecoin is USD Tether, which is backed by the real U.S. dollar and can be traded on exchanges like Bitcoin or Ethereum.
- The Crypto-Collateralized Stablecoins
Crypto-collateralized stable coins similarly lock up mainstream currencies in a bank account, but instead of using USD they use crypto assets like Bitcoin, Ether, or ZCash to back the stable coin.
- The Algorithmic Stablecoins
Algorithmic stablecoins are a type of cryptocurrency whose value is kept close to a target value by adjusting supply through some kind of algorithm. So, unlike with an inflationary coin like bitcoin, where miners can earn more coins as time goes on, or a deflationary coin like Tether (USDT) where there can never be more than 21 million coins in existence, an algorithmic coin can have a fixed total supply, but maintain price stability through adjusting supply based on the current price
Some of the Best Stablecoins on the Market
The best stablecoins must sustain transparency in their holdings and have a high trading volume so they can act as a liquid medium of exchange. One example is Tether, the third-largest cryptocurrency after Bitcoin and the largest stablecoin with a market capitalization of nearly $83 billion with a current USDT price of 1.0001406 and a market cap of 68.38 billion dollars.
Here are the best stablecoins to invest in, including DAI and UDSC. Each entry on this list includes trading volumes between June 25 and July 25, 2022.
Best Algorithmic Stablecoins
- Neutrino
The crypto world has a new stablecoin, and its name is “neutrino.” It’s unique in that it will be the first stablecoin to use a protocol called “atomic swaps” to exist as an ERC20 token on the Ethereum network. This means that it will be possible to buy/sell neutrino at decentralized exchanges that support ERC20 transactions.
Because of this, neutrino will be immediately accessible to anyone who owns Ether (ETH). This makes it different from other stablecoins like Tether (USDT), Circle (USDC), or MakerDAO (MKR) whose coins can only be purchased directly through the issuer and are typically limited to certain exchanges.
- Decentralized
Decentralized stablecoins that allow for rapid transfers of value have gained popularity in the crypto markets as a way to increase liquidity and decrease volatility. A decentralized stablecoin is one that is pegged to some fiat currency, such as the US dollar, and can be used to store value without holding the fiat directly.
The most popular decentralized stablecoin project is MakerDAO’s Dai (DAI), which is currently pegged to the US dollar. Dai aims to provide the benefits of digital currencies while minimizing their drawbacks.
- Frax (FRAX)
FRAX is a new, partially algorithmic stablecoin that aims to provide a safer alternative to existing stablecoins. FRAX’s reserves include fiat-backed USDC and FXS, the native token of the Frax Ecosystem. The reserve ratio is based on collateral ratios, which vary the USDC price and FXS needed to mint one dollar worth of FRAX. It makes FRAX an interesting hybrid stablecoin since it has both algorithmic and fiat backing.
During the past month, 24-hour trading volumes ranged between $5 million and $42 million.
Final Thought
Hoping you’ve found our guide on stablecoins helpful in deciding which coins are the best for your investment portfolio. As more investors choose stablecoins over other cryptocurrencies not backed by any assets, we’re likely to see more of these coins continue to see favorable trading volume trends during bearish markets.
