Investing in stablecoin is a good idea when you trade in a high-volatile market like cryptocurrency. But it also comes with pros and cons.
Understanding the pros and cons of investing in stablecoin is a must. Especially if you trade in a market with high volatility. In this case, using a stablecoin might be a good idea. That being said, stablecoin also has its own advantage and disadvantage. If you don't understand its pros and cons, it can be difficult to use it for your own gain.
- Understanding Stablecoin
- Types of Stablecoins
- Stablecoin Pros and Cons
- The Best Stablecoin
- How to Use Stablecoin
A new crypto trader might not quite understand what is stablecoin and why investing in stablecoin can be a good choice. It's actually a cryptocurrency that is usually pegged to another asset that has a stable value such as fiat currencies, commodities, or other cryptocurrencies.
The rise of stablecoin began after 2017, where Bitcoin rose to almost $20,000 then fell more than 50%. Because of this, traders are looking for a less volatile crypto-based asset.
Crypto traders prefer investing in Stablecoin because it stays in the cryptocurrency market. This allows them to move faster between trades without having to wait to transfer to fiat money.
Types of Stablecoins
There are plenty of types of Stablecoin, each has its own characteristic and advances. If you are new in the crypto world, this might confuse you a little bit. Here is a guide to some major types of stablecoins.
1. Fiat Backed Stablecoin
The first on the list is fiat-backed stablecoin. This is a type of stablecoin where the tokens are associated with the value of fiat currencies. Most fiat-backed stablecoins are backed with dollars. But there are other types that are backed with other currencies such as the Chinese Yuan.
2. Commodity Backed Stablecoin
The commodity-backed stablecoin is backed with hard assets such as gold. Sometimes it can be backed with real estate as well. But the most commonly used as collateral is gold. This might be an interesting option for those who love to trade gold.
3. Crypto Backed Stablecoin
This one is quite unique. A crypto-backed stablecoin uses another crypto to counteract high volatility in the market. The goal is to maintain an overcollateralized position. The stablecoin will circulate a lower supply against the reserve as compared to fiat-backed currencies.
4. Siegniorage Style Stablecoin
Unlike other stablecoins that are using assets or currencies, this one governs and is backed by an algorithm process. The idea came from Robert Sams, a cryptographer who coined the idea of Federal Reserve Coin (fedcoin) that has this function.
Stablecoin Pros and Cons
So, after reading all about Stablecoin, you might be interested in using it to help you with trading. But, before you do that, it is important to know stablecoin pros and cons so you know what is the best type for you.
1. Pros of Investing in Stablecoin
Stablecoin price fluctuation remains constant, therefore it will not greatly affect your investment amount at any cost. In fact, the value will remain stable even after 5 years. This is a great fact considering you are always at risk when you're trading in a volatile market.
The speed of financial transactions on blockchains is faster than the traditional processes. Because stablecoins don't have to wait for the 3rd party to transfer, this also means you do not have to pay 3rd party transfer fees as well. Not to mention transactions will be recorded on a public ledger making it very transparent.
2. Cons of Investing in Stablecoin
Stablecoins are decentralized because they are created by the organizations that own the currency. Because of this, stablecoin faced scrutiny. Although it does not need 3rd party for transactions, stablecoin needs to be audited through a 3rd party. This can create a conflict of interest to traders who want to trade in a decentralized environment.
Unlike any unpegged cryptocurrencies, stablecoins don't provide the potential for high ROIs to investors.
The Best Stablecoins
Since they rose to popularity, there have been many kinds of Stablecoin out there in the market. But which one is the best? That itself is a hard question to answer as they all have their own pros and cons. On the bright side, there is plenty of stablecoin that you can choose. Here are some of the best stablecoins right now:
1. True USD
True USD or TUSD is a stablecoin that is backed by US Dollar. It is considered one of the most liquid stablecoin in the market. The advantage of TUSD is the lower transaction fees that allow wire transfers of fiat currency and higher interest rates on stored balances. The company behind TUSD also has other stablecoins pegged to other major currencies such as True GBP, True AUD, and many more.
The name Tether is quite familiar for those who use stablecoins. This is one of the most popular stablecoin in the crypto market. Tether chain itself to the value of USD and is backed by gold, traditional currency, and cash equivalent. It is also known for its security and easy integrations with crypto to flat platforms.
3. USD Coins
Also known as USDC, it's a stablecoin that is backed by Coinbase. If you don't know Coinbase, it is one of the biggest Bitcoin brokers and exchange holders of Bitcoin.
4. Binance USD
Crypto exchange Binance also releases a Binance USD, which is also called BUSD. It is pegged 1:1 to the US Dollar.
See Also: Top 10 Crypto Exchange for Beginners
5. Paxos Standard
Paxos Standard, also called PAX, aims to keep 1:1 parity to the USD. It was created to answer the Tether printing controversy.
How to Use Stablecoin
If you want to start investing in stablecoin, you might want to find out how to use it. In short, it can be done on participating exchange platforms. But remember that every platform might have a different policy or different sign-up process.
Now that you are registered, you need to purchase stablecoin with a 1:1 ratio. Most platforms allow credit or debit cards, so make sure you know what kind of payment method they are using. This step is similar to choosing which site to buy cryptocurrencies from.
Once you purchase a coin, it will appear as an asset in your wallet. Now you can convert stablecoins as often as you want. You can also trade against popular crypto coins.
You can also transfer stablecoin into a crypto-saving account. Typically, you won't earn interest with stablecoins. But a crypto saving account can ensue interest over time, so it is worth trying.
Like any other asset, investing in stablecoin comes with advantages and disadvantages. However, if you are trading in a market that has high volatility like cryptocurrency, it's a good idea to find stability. There are alot of type of stablecoin, so you can choose one that fit your needs.
Investing in stablecoin does not brings you significant profit by itself, but trading cryptocurrencies might. You can find out how to make profit from cryptocurrency here.