What Do You Know About Stablecoins?

September 21, 2022

Get to know about stablecoins

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During the bear markets, 3 coins among the top 6 hang in there and have their prices stable.
Well,  so far stable.
Here are the stablecoins story you need to know:

1. What are stablecoins?

1.1 Stablecoins are a type of cryptocurrency that is pegged to a stable asset.

Stable assets could be gold or the US dollar.

1.2 The value of a stablecoin is to remain consistent, even when the market is volatile.

This peg helps to stabilize the price of the coin and reduce volatility.

1.3 Stablecoins are so huge in the crypto world that no investor can ignore them.

Currently, 3 of the top 6 cryptocurrencies by market cap are stablecoins.
https://coinmarketcap.com/
——maybe Mariel can make a ranking image of top6?

2. 3 different types of stablecoins

2.1 Stablecoins which are backed by fiat currencies are the most common type.

Like Tether (USDT) is backed by U.S. dollars.
But they are also the most controversial.
No guarantee that the issuer will actually have the money to back the stablecoin.

2.2 Some stablecoins are backed by crypto, like BTC or ETH.

Wrapped Bitcoin (WBTC) is a stablecoin backed by Bitcoin.
However, crypto-backed stablecoin usually has an extra layer of protection to eliminate the volatility of cryptocurrency.

2.3 Algorithmic Stablecoins

Algorithmic stablecoins are backed by a mathematical formula, which is designed to control the supply.
To keep the price stable, an automatized system will increase or decrease the supply of stablecoins.
TerraUSD (UST), is an algorithmic stablecoin that was supposed to be pegged to the U.S. dollar.

2.4 Gold-backed stablecoins are a new type.

They are backed by very stable assets, like gold and silver.
But they are not as widely accepted as USD-backed stablecoins.
Digix Gold Token (DGX) is one example.

2.5 Each type of stablecoin has its own strengths and weaknesses.

But no stablecoins are too big to fall.

3. Why people need stablecoins?

3.1 For payments, like Venmo and Paypal.

The transaction fees are relatively low, less than $1.

3.2 For crypto investments.

Stablecoins are also used as a place to store value.
Transferring assets from wallet to bank account takes a couple of days.
The quick transaction of stablecoins to coins allows one’s funds to go into next investment right away.

3.3 As a hedge against the volatility of cryptocurrencies and economies.

You can hold some USDC instead of Bitcoins, to reduce your exposure to price swings.
You can convert your fiat currency into a stablecoin to avoid impacts from recession.

4. Stablecoins could be volatile

4.1 Keep an eye on Tether

The controversy lies in the USD-backed stablecoins is whether issuers actually have that money.
The investigation is ongoing.

4.2 As for UST stablecoins, they crashed heavily during the bear market.

Starting from May 9 of 2021, while UST was the 3rd biggest stablecoin by market cap, it lost 99.4% of its value in 10 days.

Key takeaway:

Every investment comes with risks.
Even they name themselves “stable”!
Be careful and DYOR (Do your own research).

Sources

https://www.youtube.com/watch?v=-whuXHSL1Pg

https://www.theverge.com/22620464/tether-backing-cryptocurrency-stablecoin

https://www.cbinsights.com/research/report/what-are-stablecoins/

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