Price volatility has always been one of the biggest hurdles for cryptocurrencies. Twitter or any statement from a relevant character is enough to change the price of bitcoin, for example. This is what stablecoins are born for. We tell you what they consist of below.
Stablecoins are designed to combat the volatility of conventional cryptocurrencies by pegging their value to that of a (traditional) fiat currency like the US dollar or a physical asset like gold.
As long as the value of the asset a stablecoin is pegged to remains stable, that coin will as well.
As an example, the stablecoin Tether is pegged to the US dollar and therefore its value has remained relatively stable.
However, it has other quite curious and really useful uses. Stablecoins have unique advantages, such as using them to transact directly through smartphones ( no bank account required).
Coin owners can also put their money in a more stable currency if they live in a country where inflation is rampant.
Many cryptocurrency exchanges also don’t charge a fee when trading stablecoins, so people have used them to avoid fees associated with other currencies.
If you want to liquidate your Bitcoin reserve, for example, you can exchange it for USDT, and then exchange that stablecoin for dollars. This also works in reverse; cryptocurrency traders can exchange dollars for a stablecoin like Tether, and then exchange that currency for another cryptocurrency.
Now, although these cryptocurrencies seem to be stable, the truth is that their value changes. The concept is the same as that of inflation. A $1 bill in 1950 is still a $1 bill in 2021.
The difference is that the amount of assets you can buy with it is different. In this way, if the price of the dollar against other currencies falls, if you have Tether stablecoin), your money is also affected.
In short, stablecoins are an investment instrument that can be used a lot if used correctly. In addition, the sector is booming and more and more companies are investing huge amounts of money to create the stablecoin of the future.
The most relevant thing about them is their role as mitigators of volatility in cryptocurrency portfolios. However, they are very useful when making transfers from one exchange to another and to take advantage of market falls.