Stablecoins are virtual coins whose value is pegged to a stable value. In most cases stablecoins are retain their value in either popular fiat currencies like the U.S Dollar or Euro or the Chinese Yuan, or they can also be locked to commodity values like gold or other precious metals. Stablecoins like the name suggest provide price stability to digital assets. Unlike other cryptocurrencies whose values swing in a matter of minutes stale coins offer stable price value to coin holders.
The entry of Generation Z investors into the mainstream and cryptocurrency trading markets over the last two years has contributed to the dramatic increase in stablecoin adoption. New traders and investors in the crypto trading markets were fast to convert their stimulus checks into stablecoins.
If we look towards the activities in the crypto space in 2021, we will witness the development of many new blockchain applications, trading platforms, and non-fungible tokens (NFTs) marketplaces. With so much activity happening in the space, the demand for stablecoins was bound to rise.
Stablecoins ensure price stability following different technical or algorithmic models. The fact that stablecoins retain their value makes a wealth of opportunities possible on them. Before diving deeply into the possibilities stablecoins provide, it’s best to first learn about some of the major types of stablecoins.
Types of Stablecoins:
There are several different types of stablecoins which differ from each other on the technology or mechanism behind providing a stable value. If we were to categorize them then broadly there will be three types
- Stablecoins backed by fiat currencies (U.S dollar etc)
- Stablecoins backed by other cryptocurrencies (Decentralized coins)
- Stablecoins backed by algorithms
If we talk about market penetration then stablecoins backed by fiat currencies are the most popular. There is also a rise in the demand for decentralized stablecoins, which correlates the popularity of the associated cryptocurrency its value is pegged to. Since now we broadly understand the major types of stablecoins lets try to understand the benefits they offer to traders worldwide
Understanding the finance behind stablecoins:
As we have discussed in the beginning the fundamental feature of stablecoins is their price stability. Stablecoins bring the best of both worlds to the crypto space. It bring the transparency and decentralization of cryptocurrencies and it brings the price stability and easy liquidation of fiat currencies.
One might argue what benefit does price stability provides and how it’s advantageous for traders. Let’s try to wrap our heads around this aspect of stablecoins.
What benefit does price stability offer?
The price stability of stablecoins has several advantages. The biggest advantage by far is a hedge against market forces in bearish cycles which affect coins like Bitcoin and Ethereum heavily. Other advantages of stablecoins include the flexibility in which they can be used for trading moreover:
Being very easy to use for traders
Enabling cross-border payments with low fees
Providing liquidity for Decentralized finance applications
And much more…
Since we are talking about the features of stablecoins especially for investors let’s take a look at some of the advantages stablecoins provide to traders and investors in the crypto market.
Easy acceptance on exchanges:
Stablecoins are readily accepted on both centralized and decentralized exchanges, since their value represent close resemblance to poplar fiat currencies like the U.S Dollar, it’s a matter of convenience for most traders to use stablecoins on exchanges.
Another advantage stablecoins provide is with trading pairs. As most traders open up positions on spot trading via a cryptocurrency trading pair, having one based on stablecoins is an obvious choice. Stablecoins based trading pairs represent the biggest volume of opened positions on both centralized and decentralized exchanges and for good reason, in case of negative price movements its the safest bet to hedge against volatility via stop loss orders.
Advantages in DeFi:
Stablecoins provide a host of features for the decentralized finance space as well. Since DeFi applications have lock in periods, and there is a high risk of loosing cryptocurrency value in the short to long term the safest bet is to use stablecoins for lending and other applications within the DeFi space.
According to DeFi pulse total value locked in the DeFi space is closed to $66. 46 billion. Its safe to say that stablecoins are the primarily reason behind this meteoric rise in DeFI sector TVL.
Providing easy liquidity and exchange:
If the past couple of months have taught us anything, it’s that cryptocurrency trading is not for the faint of hearts. The price volatility which the market saw was unprecedented. Bitcoin fell from $60,000 to mid $30,000 with billions in value wiped off. In such times where even the most skill-full traders were hesitant to open new trades, stablecoins provided market stability. Among the positions liquidated majority were done in stablecoins.
There is also a flip side to this, previous in bearish trends, the market took years to recover as traders used to liquidate their positions in fiat currencies which is close to quitting really. But now most traders continue to hold their positions in stable coins which has resulted in much sooner market bullish trends and recovery.
There is also the advantage of easy cross border payments. In case there are regulatory restrictions or compliance issues traders can easily send their stablecoins to friendly jurisdictions avoiding any issues on their crypto holdings.
The total market capitalization of stablecoins has exceeded $100 billion. The fact that they are not influenced by the volatility of the bitcoin market allows them to offer a fresh perspective to the trading space. Unlike other currencies, stablecoins operate in the same manner as they do for other currencies. They are a totally new kind of electronic money that has never existed before. They have the potential to be utilized for decentralized banking, trade, and trading exchanges. Simply said, stablecoins enable you to enjoy the best of both worlds while still maintaining your financial independence.
Minimal trading fees:
As most cryptocurrency traders, everyone manages several crypto wallets and positions on different platforms. Managing multiple positions on cryptocurrencies is expensive as exchanging and withdrawing cryptocurrencies like Bitcoin and Ethereum is very expensive. In comparison to this managing a large and multi platform portfolio on stablecoins is pretty straightforwards.
The fact that there are such low fees makes them a viable candidate for most traders who like to operate on different platforms. Moreover since transaction fees are so low or negligible on platforms like Binance, majority of traders rely on stablecoins for their trading needs.
Providing a safe exit strategy:
As we have seen in 2021, cryptocurrency trading is not for everyone. Many people gave up on cryptocurrency trading when they lost thousands of dollars when their favorite alt coin crashed overnight or the next big project they were hoping to go up had a rug pull. Many traders realized that keep their positions in alt coins or even bitcoin or ethereum is not safe since they are subject to heavy market manipulation and price fluctuations. Stablecoins provide a very safe exit strategy in case of negative market trends and safeguards traders positions since they are safe from market price manipulation or volatility. Moreover it also provides a safe exit strategy for investors who have had enough of the cryptocurrency trading markets and want to cash out while retaining their original investment.
This is only possible due to the price stability feature of stablecoins.
If we talk about the overall crypto market, 2021 has been a roller coaster year where unprecedented adoption of cryptocurrencies was witnessed. The tremendous growth in the crypto market has been in all vertices of the market and its safe to say that stablecoins have been the fuel of this growth.
The market is just opening up and there is tremendous potential for stablecoins to offer price stability, transparency and liquidity for new trading platforms, marketplaces and traders to grow and scale their crypto holdings. Moreover, there is rising consumer interest and acceptance towards stablecoins, which make them a valuable cryptocurrency in the future. With rising regulations coming towards cryptocurrencies stablecoins offer a better alternative that can ensure governments that cryptocurrencies can become a safe investment class for their citizens as well.
Stablecoins have lately garnered a lot of interest in the financial sector. However, before making a choice on whether or not to invest in this asset, you should be fully aware of all of its advantages as well as any possible disadvantages that may exist.
Stablecoins are disrupting every industry imaginable today. From cross-boarder payments to e-commerce, from trading markets to decentralized finance. Their contribution towards the cryptocurrency market growth is undeniable. Despite Bitcoin and Ethereum’s dominance stable coins and other alt coins don’t offer the easy and flexibility and to cryptocurrency traders. From retail investors to institutional investors the market is bullish towards stablecoins. With growing market capitalization and gaining mainstream momentum stablecoins offer traders a great digital asset that has a strong future ahead of it.