The volatility of cryptocurrencies is frequently cited as the most significant source of criticism by old-school economists. Stablecoins serve as a counter-argument to the cryptocurrency bubble by guaranteeing that their value remains constant. Aside from that, stablecoins are “collateralized,” which means that the whole value of stablecoins is almost guaranteed by assets held in reserve. Typically, they are tied to the value of fiat currencies such as the United States dollar, the euro, the yen, and so on, but they may also be tied to the value of other commodity assets such as oil, gold or other precious metals.
Stablecoins have shown to be helpful for crypto traders, investors, and speculators during periods of market volatility, as a means to hedge against losses or to preserve profits in fiat during poor markets within the same asset class, thus maintaining the value of the asset. Leaders in the cryptocurrency sector believe that stablecoins are a significant step forward in terms of increasing adoption. When prices are stable, they are predictable, and this predictability overlaps with fiat-based use cases such as monthly payments, rent, salaries, and other comparable circumstances.
The quantity of stablecoins is also expected to fluctuate in response to market circumstances; there are many stablecoins available in the crypto ecosystem today, each with its own set of advantages and disadvantages as well as their own unique characteristics. KYC (Know-Your-Customer) rules must be implemented by stablecoin trading platforms in order to combat illegal financial activity like as money laundering. Regulators in different countries have set guidelines mandating stablecoin trading platforms to adopt KYC policies.
With the exception of the small percentage of Bitcoin and cryptocurrency community members, almost everyone agrees on the significance of stablecoins and the value they offer. The popularity of stablecoins has risen in recent years, due mostly to the fact that they are completely decentralized. All of these elements, including new projects, decentralized apps, trading platforms, and NFT marketplaces, have made significant contributions to the growth of the stablecoin user base in recent months.
As a consequence of the rapid increase in popularity of stablecoins, a large number of new users are coming to the cryptocurrency markets to buy and hold stablecoins. When considering purchasing stablecoins, there are a few factors you should consider:
Stablecoins, for starters, have lower volatility than other cryptocurrencies, which is beneficial.
In spite of the fact that their supply fluctuates over time, stablecoins are coins whose value stays consistent over time. In contrast to other cryptocurrencies, the values of stablecoins will not change much, while the prices of other cryptocurrencies may fluctuate drastically. Unless and until anything extraordinary occurs, the asset to which they are linked will remain untouched by what is happening.
Obviously, one disadvantage of this is that it reduces your chances of earning significant long-term profits, which is one of the main reasons why so many investors are drawn to cryptocurrency in the first place. However, at the same time as the value of Bitcoin has increased by almost fivefold in the preceding five years, the stablecoin is still only worth $1 every unit of the currency in circulation.2.
Use cases for Stablecoins
Stablecoins are generally accepted on all almost all crypto platforms and applications. And represent the post popular cryptocurrency for choosing a trading pair on crypto platforms. It is necessary to have overview of the types of use cases stablecoins can server before owning them or making them a part of your portfolio.
Stablecoins, which are usually tied to fiat currencies, offer traders with a more stable means of exchange since they ensure that their value in the digital world stays consistent independent of fluctuations in the value of other coins. As an example, one of the most popular stablecoins is believed to be responsible for about 80% of all cryptocurrency transactions, showing the currency’s broad acceptance.
a. Participating on DeFi Platforms:
Global stablecoins allow investors to earn income on their crypto assets in the DeFi market while mitigating the possible negative impacts of market volatility, which is a key feature of the cryptocurrency market.
b. Online Gaming:
Stablecoins will not only make online gambling more convenient, but they will also prove to be revolutionary in the esports industry. Due to the fact that stablecoins may be used as in-game currencies, players can simply spend the in-game money they have earned outside of the game. The ease with which gamers may monetize their time would allow them to spend more time gaming as a result of the increased opportunity.
c. Buying and selling art
Several schools of thought believe that stablecoins are the ideal money for the digital art market, and this is supported by empirical evidence. In the cryptocurrency world, stablecoins are hailed as a reliable, decentralized, and global money. Because of these characteristics, it is a dependable and more than enough connection to the rapidly expanding crypto art sector.
Are Stablecoins Safe?
The answer to this question is that yes stablecoins are very secure. Their degree of risk is comparable to investing in the stock market. One of the primary distinctions between stablecoins and other cryptocurrencies is that their degree of risk is pretty well-known. In contrast to conventional investment, where the majority of information about reserve accounts, backing banks, and shadow parties is gathered via extensive investigation.
Additionally, the US Office of the Comptroller of the Currency has approved stablecoin for usage by banks, which presumably implies that additional restrictions will be implemented, enhancing the stability and dependability of stablecoins. Additionally, stablecoins backed by cryptocurrency use smart contracts, which guarantee that contractual obligations are fulfilled. Embedded rules may be a necessary component of how stablecoins mitigate risk. However, the manner in which that commitment is fulfilled even if assets are absent may be catastrophic, reverting the onus to the obliged bank.
Coin buyers may minimize risk by investing prudently. Coin issuers may also consider this as stablecoins become increasingly regulated under the federal regulatory framework in the United States.
Tax on Stablecoins
Cryptocurrency taxes are based on an IRS ruling from 2014 that cryptocurrency should be taxed as a capital asset (similar to stocks or bonds), not a currency (like dollars or euros). This rule had significant ramifications for cryptocurrency owners, who are now subject to more complex taxation. When capital assets are sold for a profit, the proceeds are subject to taxation including cryptocurrencies.
Capital assets are taxed when they are sold for a profit. When you use cryptocurrencies to purchase products or services and spend more crypto than the amount paid, the transaction is liable to capital gains taxes.
Since stablecoins are a form of cryptocurrency they are treated similar for tax purposes as well. If you acquire stablecoins via mining or get it in exchange for products or services, it is treated as normal taxable income. You are required to pay tax on the full value of the stablecoins on the day it was received, at your standard income tax rate.
Additionally, if you get stablecoins via these activities and subsequently spend or sell it for more than its initial worth, you may face short- or long-term capital gains taxes on the earnings, depending on how long you kept it.
Future of Stablecoins
Stablecoins may see significant advancement in the next year for two reasons: one, as a result of the prolonged insecurity of volatile tokens; and two, because the current innovations in the stablecoin space. Furthermore, according to credible sources, the number of stablecoins available for use is projected to grow by up to 500 percent, proving their position as “quite possibly the most-utilized cryptocurrency on the planet.” It is also predicted that value of dollar-backed stablecoins would reach $150 billion in the near future.
Stablecoins have had an interesting year so far in 2021. As shown in the most up-to-date CryptoSlate statistics, deposits increased by 155.5% during Bitcoin’s fall in May of 2021.
Other cryptocurrencies don’t necessarily follow the Bitcoin pattern, however, stablecoins (in contrast to other cryptocurrencies) do not follow this trend. Furthermore, it seems that when people are faced with uncertainties, they prefer to use stable currencies as a refuge from the fluctuating value of the financial markets.
In recent months, there has been a heated discussion among regulators, traditional investors, and cryptocurrency enthusiasts over stablecoins.
As new ways of creating value via cryptocurrencies and stablecoin initiatives have been developed, the industry has witnessed a rise in the number of projects.
The stablecoin industry is in good shape because of growing maturity, interesting new developments, and better-than-expected resistance to short-term risk. Stablecoins are beneficial to the whole crypto-sphere since they are crucial to the mainstream acceptance of cryptocurrencies. The number of stablecoins has increased exponentially in 2021, and it doesn’t seem to be abating anytime soon.