The role of stablecoins in the cryptocurrency market
The stablecoin name is assigned to digital assets whose value is backed by the underlying asset. Such coins are much more stable compared to classic cryptocurrencies and are designed to minimize the impact of cryptocurrency market volatility. The most popular coins are backed by the US dollar as it is the world’s reserve currency. Stablecoins serve as a link between fiat and digital currencies. Therefore, at least one is available on all cryptocurrency exchanges and on major platforms, the conversion of stablecoins is mutually supported, for example USDT to BUSD.
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Types of stablecoins
Stablecoins are classified according to various parameters. According to the control system, there are three types of coins:
● Centralized.
● Decentralized.
● Algorithmic.
The current classification of stablecoins by collateral looks different:
1. Fiat Backed Assets. These coins are backed by real money held in the accounts of the issuing companies. The volume of collateral assets should ideally match the number of tokens in circulation.
2. Supported by cryptocurrencies.
3. Backed by raw materials, precious metals, etc.
4. Algorithmic Stablecoins. They have no real collateral and the stability of the exchange rate is automatically adjusted depending on the balance between supply and demand.
Each of the stable assets has its own characteristics and fulfills a certain function in the market.
Fiat-backed stablecoins are very popular among retail investors investing or trading cryptocurrencies. They are used for profit taking and accumulation – generally much the same as collateral currency in the digital world.
Cryptocurrency-backed coins are more popular among venture investors, developers, and crypto enthusiasts. Retail investors use such coins quite rarely, mainly for long-term investments.
Main differences from classic cryptocurrencies
The most notable feature of stablecoins is their low volatility. In fact, they were created as a value retention tool.
Another important feature of stablecoins goes unnoticed by the average user. Coin issuance is theoretically unlimited. The issuing organization can issue as many coins as it wants, while most cryptocurrencies have a limited supply.
Stablecoins are not particularly sensitive to artificial price rises and falls (the infamous pump-and-dump scheme), they are resistant to market crashes. Low volatility offers the opportunity to save value, but it is almost impossible to make significant profits from exchange rate fluctuations.
Рros
Since assets are backed by real value, they are a fairly reliable investment tool. The sudden disappearance or depreciation of an asset is unlikely.
They are a universal means of storing value that can be used to record profits, investments for any time period, as well as in any type of trading on crypto exchanges of any type.
Stablecoins are open digital assets that are almost independent of central banks
Handy for making any payments.
They are available on all crypto exchanges and form trading pairs with almost all existing cryptocurrencies. Finding a platform where you can exchange HNT to BUSD is much easier than selling a coin for USD.
Minuses
As a rule, these are highly centralized assets, as they are issued by specific organizations: funds, crypto exchanges, private financial institutions. The decision to issue coins is made by the issuer and this is reflected in the exchange rate.
Any problems of the issuing company will inevitably affect the currency’s reputation and exchange rate. For example, Tether was often accused of insufficient collateral quality.
The possibility of robbing the bank where the underlying asset is stored is not ruled out.
The number of stablecoins is increasing. If you plan to use them to store your savings, the diversification caveat still applies.