The term stablecoin is currently getting more popular in the realm of crypto traders. So, what is it actually? Stablecoin is a new class of cryptocurrency that tries to offer a more stable price as well as it is supported by varied assets. Besides, it is also claimed to be free from volatility from fiat currencies.
Background of the Stablecoin Development
The development of stablecoin is based on many factors. The primary one is related to the weaknesses of cryptocurrencies. Undeniably, cryptocurrencies like Bitcoin and Ethereum offer some benefits. One of them that makes cryptocurrencies likable is because it implements the blockchain system that removes the third party during transactions.
But there is also the main weakness of regular cryptocurrencies. The price or value of the cryptocurrency is unpredictable. It also tends to fluctuate, making them seem to be difficult to be used by common people without experience in trading. Mostly, people just want to know the change of their money value a few days from when they start investing. Sure, it is for their own security. Unfortunately, this important thing is the one that cryptocurrencies like Bitcoin cannot give.
Even the value change of cryptocurrencies happens very drastically. Other fiat currencies and assets including gold tend to be more predictable. Therefore, although the profit offered is smaller, people find those currencies are more secure than cryptocurrencies.
The easiest example of the drastic change of cryptocurrencies is related to Bitcoin. At the end of 2020, Bitcoin rose from the level of around USD 6,071 to USD 20,285 only in a month from November to December. Later, it decreased to USD 7,142 at the beginning of February.
For professional traders, the drastic change is seen as an opportunity to gain many more profits. Well, even if they are unlucky, they may lose also. This kind of short-term volatility makes cryptocurrencies not really suitable for the general public. They even don’t fulfill one of the currency requirements in economic principles; as a monetary exchange.
Ideally, crypto money must maintain its buying power as well as experiencing inflation as low as possible. While general cryptocurrencies cannot do that, stablecoin does.
The Value of Stablecoin
Designing as a solution of cryptocurrencies, stablecoin, just like the name, is more stable in terms of fluctuation. The value is also getting higher as it was once around USD 10 billion in May 2020. That’s why, many people find it as an alternative for cryptocurrencies, yet, Bitcoin is still more popular.
In some countries, stablecoin is also chosen for particular reasons. In Brazil, for example, people move to this investment asset to save their money as their currency is not stable due to the economic condition. Meanwhile, in Hong Kong, some people use stablecoin to prevent problems as their worst political situations.
Types of Stablecoin Collateral
Along with the rise of stablecoin popularity, the products come with collateral or guarantee that is in the form of some assets as follows.
First, there is fiat. Fiat is the most common collateral for stablecoin. Among many fiat currencies, of course, the USD is the most popular one. Another currency that are used as the fiat of stablecoin is Bilira, referring to Turkey’s Lira.
Second, stablecoin also uses gold as collateral. Although the increase of the value tends to be slow, gold is very stable. This classic investment asset still has so many demands until now. Aside from gold, silver is also widely used as the stablecoin’s collateral.
Third, certain types of cryptocurrencies are also used as stablecoin’s collateral. Big names like Bitcoin and Ethereum are chosen as they have been known for their good reputation as well as can get so many users.
Benefits of Stablecoin as an Investment Asset
As has been discussed above, stablecoin provides a solution to the use of the cryptocurrency that tends to be unstable. The value change tends to be predictable so that it is friendlier for the general public.
Well, it is not the only benefit of choosing stablecoin as your investment asset. Below, there are still many other reasons why you must consider using it.
First, it is still a kind of cryptocurrency. While both have some different characteristics, you can still say that stablecoin is a part of cryptocurrencies. Stablecoin uses the blockchain system just like Bitcoin and others. If you go to crypto money to avoid the role of the third party in your transaction, stablecoin is the choice. Of course, you can enjoy some benefits such as transparency and more security just like when you invest your money in the form of general cryptocurrencies.
Second, stablecoin is also recommended as an international currency. In this digital era, it is not a weird thing to buy a product from other countries. This activity is getting easier if there is a currency that can be used by all people in the world without borders. Bitcoin is always a good example of it. However, people choose not to use it because of its uncertainty. Since stablecoin is the opposite of cryptocurrencies in terms of stability but it represents a general currency worldwide, in the future, it is potential as the international currency.
Third, stablecoin is a solution for you who are not interested in opening a bank account. The blockchain system is getting more popular as it provides a direct transaction without the role of the bank as the third party. For some reason, this system is considered safer, cheaper, and more practical. That’s why, some people decide not to open a bank account and choose to practice the blockchain system through cryptocurrency. Sure, with stablecoin, anything seems to be better.
Some Popular Stablecoin Currencies
There are some currencies in the category of stablecoin. Some of them have been popular with many users in the world. One of them is Tether, a nickname of USDT. The name is taken from a company originally from Hong Kong, Tether. USDT itself stands for United State Dollar Tether.
The next popular stablecoin currency is USD Coin (USDC). It is a kind of token to invest, make loans, trade, and pay. It was launched by Coinbase and has become one of the most trusted stablecoin currencies currently.