The massive trend of bitcoin and cryptocurrencies other over the past few years has led many investors to put money in the digital currency market.
However, crypto is volatile and risky. Because they are not supervised by any central authority. Plus, their prices are completely dependent on the supply and demand of coins.
So , what can investors do to protect their digital currency portfolios from such volatility? The alternative is to invest in stablecoins. Here's the explanation!
What are stablecoins ?
Stablecoins are cryptocurrencies that are backed by real-world assets such as commodities, fiat (government-issued) currencies or gold. They are the result of the idea of investors crypto early , who experienced extreme volatility, for digital alternatives to fiat currencies. Stablecoins can be considered to have full value over time.
Stablecoin value does not fluctuate as much as crypto such as bitcoin or ether. And they can also be made stable using computer algorithms.
A stablecoin is a digital asset that has a stable valuation like a fiat currency but also provides utility and mobility like a currency crypto . Simply put, they can be seen as a bridge between cryptocurrencies risky and stable fiat currencies.
What are the types of stablecoins?
There are basically four types of stablecoins which are distinguished based on three criteria:
1. There is an issuer/custodian who is responsible for fulfilling each of the attached claims.
2. How decentralized decision-making is over stablecoins.
3. The underlying value of stablecoins and their stability in the preferred currency.
Stablecoins backed by fiat currencies
The value of these stablecoins is pegged to the currencies that back them. For example, if a stablecoin is backed by a fiat currency, say the US dollar, that means each stablecoin is equal to USD 1.
Therefore, if a stablecoin issuer has a reserve of USD 3 million, they can only issue three million stablecoins, no more. Tether is an example of a fiat-backed stablecoin.
Supported Stablecoin crypto or on-chain
This coin is backed by another asset, usually cryptocurrency another , such as ether or bitcoin. And yep, the value of this type of stablecoin is comparable to the value of cryptocurrency the underlying .
backed stablecoin crypto- This uses smart contracts and does not require a central issuer or custodian. Dai is an example of an stablecoin on-chain backed by ether units.
Stablecoins backed by securities/commodities or off-chain
These stablecoins are backed by other traditional assets such as securities or commodities. They can be collateralized by precious metals such as gold, oil, or real estate.
Investors can also redeem their investments in stablecoins and get physical delivery. Therefore, this process requires a representative. However, token redemption is only possible for the specified guarantee measure.
For example, many issuers only send gold bullion when you exchange gold-backed stablecoins. Therefore, if one stablecoin token is equal to one gram of gold, the number of stablecoin units required will be proportional to the weight of the gold bullion.
Gold is more popular as a collateralized commodity. Tether Gold (XAUT) and Paxos Gold (PAXG) are among the most liquid gold-backed stablecoins.
Stablecoin algorithmic
Algorithmic stablecoins are not backed by any warranty. However, it uses a special algorithm to maintain the price of the coin. If the price of a stablecoin falls below the price of the fiat currency it tracks, the algorithm will reduce the number of tokens in circulation.
Meanwhile, if the price of a stablecoin rises above the fiat currency it tracks, the algorithm increases the number of tokens in circulation to match the value of the stablecoin.
So the process does not require any custodian for the underlying assets and the operation is completely decentralized. NuBits is one of the algorithmic stablecoins that has been around since 2014.
How to buy stablecoins?
You can buy stablecoins in the same way that you buy cryptocurrencies other from various crypto exchanges. You can buy these coins from marketplaces like WazirX through a simple process.
-Visit the website.
-Create an account by providing the required details.
-fill in the digital wallet then you can trade or invest in stablecoins.(*)
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