The crypto market is a broad niche, encompassing a wide variety of different coins and tokens. Stablecoins are an essential part of this ecosystem as they serve as an on-and-off ramp for investors. These cryptocurrencies are pegged directly to traditional currencies like the US dollar and help investors remain in the market and on the blockchain, while at the same time avoiding its volatility.
This article will provide you with some basics on stablecoins and their advantages, as well as provide reasons for investing in these assets. Moreover, it will go over some of the most popular stablecoins and compare their pros and cons. This should give you a good idea of which one suits your portfolio best.
Reasons to Invest in Stablecoins
Before we get into the details of the benefits of stablecoins, let’s compare them to other cryptocurrencies. Bitcoin, for example, is a speculative asset, which means that its price in your local currency will vary over time following the laws of supply and demand.
This isn’t the case for stablecoins. These cryptocurrencies are permanently pegged to a fiat currency of choice (usually the USD), and their values will always stay close to a ratio of 1:1. So, regardless of the status of the market, a USD pegged stablecoin will always be equal to around one USD. As such, you can watch the live forex rates to see how stablecoins fare against your local currency.
This allows stablecoins to conserve the main advantages of blockchain technology such as decentralization and peer-to-peer transfers. Consequently, they provide the following benefits to investors:
- Shield from the volatility of the market, while remaining in the ecosystem. During a market downturn, investors can sell their crypto holdings for stablecoins and avoid hefty fees.
- Can be used to get passive yield on platforms like fi by providing liquidity to the market.
- They are effective for international money transfers or CFD trading thanks to fast transactions and very low fees.
We can conclude that stablecoins are a crucial element of the crypto market and provide users with a ton of benefits and almost no drawbacks. The only issue is that their value doesn’t increase over time, which is a feature reserved for speculative cryptocurrencies.
Top 5 Most Popular Stablecoins
Below is a list of the most popular stablecoins that can be found on the market today.
Tether, or USDT, is the first popular stablecoin and was launched as Realcoin in 2014. The company behind this currency holds reserves of USD in various financial instruments (cash, obligations, debt) to be able to issue the same amount of USDT into circulation. The coin can be found on multiple blockchains, including Ethereum, Tron, BNB Smart Chain, and many more.
Currently, USDT remains the top stablecoin by market cap, with more than $80 billion in circulation. At the moment of writing, it holds 3rd place in the list of most valued cryptocurrencies.
DAI runs on Ethereum, and unlike Tether, it’s entirely decentralized. The connection with the USD is managed by the Maker Protocol and is governed by a decentralized autonomous organization (DAO). The collateral for DAI is provided by various other digital assets that are locked in the protocol’s smart contracts. There are $8.5 billion DAI in circulation.
Binance USD or BUSD is a stablecoin that is governed by the Binance crypto exchange. The exchange partnered with Paxos to provide BUSD users with a regulated stablecoin that complies with the New York State Department of Financial Services (NYDFS).
This coin is currently in the 12th position by market cap and has $17.8 billion in circulation.
Another fully regulated stablecoin, USDC is a cryptocurrency created in 2018 through the partnership of Coinbase and Circle. The collateral is ensured by cash holdings and short-term US Treasury bonds. Many prefer USDC over USDT because of its compliance with regulative bodies and its transparency regarding audits.
USDC is ranked #5 by market cap, with $49 billion coins in circulation.
Terra USD (UST) is a bit different from the other entries on this list, as it’s not backed by collateral funds. It’s an algorithmic stablecoin that depends on the LUNA cryptocurrency for its peg to the US Dollar. As demand for UST grows, LUNA tokens are burned to mint more UST.
It currently holds the #10 place by market cap, with a total supply of $18.6 billion.
The value of stablecoins lies in their stabilized value. They provide investors with a convenient way to enter or exit their crypto positions, while not having to go through expensive fiat bridges.
Moreover, since their demand is high, they can provide varied opportunities for passive income through staking or liquidity mining. All in all, they are a great investment and can be much more profitable than simply keeping your money in the bank.