What are stablecoins and how to invest in them?

Many investors have chosen cryptocurrencies such as Bitcoin and Ethereum, but conservative investors are still refusing to invest in cryptocurrencies due to their high volatility. Such investors can be recommended stablecoins, which are less susceptible to volatility. Stablecoins are cryptocurrencies that are supported by an asset, most often a fiat currency. However, they retain most of the attractiveness of other cryptocurrencies, providing investors with access to a new and developing asset class.

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What are stablecoins?

Stablecoins are a digital currency linked to an underlying asset, such as a national currency, or a precious metal (gold). The main types of stablecoins include stablecoins backed by fiat currency, cryptocurrency and commodities.

Stablecoins are a type of cryptocurrency designed to maintain a fixed value of cryptocurrencies. Since they are tied to a more stable asset, such as the US dollar, stablecoins were created to manage price fluctuations that are often observed in bitcoins and other cryptocurrencies.

Stablecoins backed by fiat currency

A popular stablecoin is Tether (USDT). This is the first stablecoin that entered the market and received both wide distribution and the largest market capitalization. Although it is pegged one - to-one to the US dollar, its solvency depends on the strength of its reserves, which include only 3.87% of cash. USDC is another stablecoin supported by the US dollar. It was launched in 2018 by Coinbase and Circle. These are centralized stablecoins, which means that the stablecoin belongs to an organization or an exchange. In the case of the USDC, this stablecoin is managed byThey are supported by Circle and Coinbase.

Cryptocurrency-backed Stablecoins

DAI is a decentralized stablecoin supported by cryptocurrency. According to the official document of the Maker team, the Maker smart contract platform, built on the Ethereum network, supports and stabilizes the value of DAI. The purpose of this digital asset is to try to keep its value corresponding to the US dollar and maintain it in the Ethereum blockchain network. This is achieved due to the fact that people can use their Ethereum assets to create DAI on the Maker platform without intermediaries.

Stablecoins with commodity collateral

These stablecoins are backed by precious metals, such as gold or oil. One of the most famous stablecoins in this category are Tether Gold and Paxos Gold. Commodity-backed stablecoins are more susceptible to price fluctuations, but since commodities should increase in price in the long term, investors can buy and hold this asset to increase the cost of capital.

How to use stablecoins?

One of the main ways to use stablecoins is fast and cheap payments or money transfers on a global scale. Stablecoins provide a fast way to transfer deposits or withdrawals between fiat currencies to cryptocurrency exchanges.

When investors watch the fall of cryptocurrencies, they can transfer their money to stablecoins and wait for the market to stabilize. Investors can continue to buy stablecoins for fiat money, and this value will not change until they want to transfer it to bitcoin or other cryptocurrencies.

One more thing the advantage of stablecoins is the ease of use on cryptocurrency exchanges. They are very liquid and traded, which makes it easy to exchange them for other cryptocurrencies or fiat currencies.

It is not easy to transfer cash to cryptocurrency and withdraw it. Even if you place a sales order, it may take several days to complete the withdrawal. But if you convert your money into stablecoins, you will save their value.

How to make money on stablecoins?

There are the following ways to earn money on stablecoins:

1. Receiving interest for storing stablecoins on the cryptocurrency exchange.
2. Earnings on a loan of stablecoins to borrowers.
3. Stablecoin staking.

Storing money in stablecoins on the cryptocurrency exchange is an easy way to earn money with a low level of risk. You will receive interest by simply storing stablecoins on your balance. Since cryptocurrency exchanges need capital reserves to ensure high liquidity, they will pay significant interest rates for storing stablecoins. This can be done by simply opening an account on the cryptocurrency exchange and buying stablecoins.

You can borrow your stablecoins. Another way to make money with the help of stablecoins is to lend them to borrowers. Crypto-lending is an alternative form of investment in which investors lend fiat money or cryptocurrency to other borrowers in exchange for paying interest. The percentage of return can vary from 5% to 12% per annum, and the income is usually paid in the coin that you have lent. If you borrow BTC, you will receive income in BTC.

You can also earn money through a process called staking. Staking is similar to a deposit in a bank. You block the cryptocurrency on your account for a certain period and receive a reward from the exchange for this. This is necessary to maintain the flow of the blockchain network on a certain asset.

Investing in stablecoins backed by precious metalsami, for example, with gold, is similar to investing in gold. If the value of gold increases, the value of commodity-backed stablecoins increases as a result.

See also what brokers exist with cryptocurrency trading.

Conclusions

Thus, stablecoins are a digital currency designed to maintain a fixed value of cryptocurrencies. Stablecoins can be backed by fiat currency, cryptocurrency or gold. They are not subject to such high volatility as bitcoin and other cryptocurrencies, so they can be used as a safe haven asset during the fall of the cryptocurrency market. Moreover, stablecoins can be used for fast and cheap payments around the world. You can also earn on stablecoins, receiving a percentage from the exchange for storing them on the account, staking and issuing loans to borrowers. Gold-backed stablecoins can be an alternative to investing in precious metals.

Read also the article "The best cryptocurrencies for trading".