In November 2018, Binance, a leading crypto trading platform, announced the creation of a new unified stablecoin market. It renamed the USDT Market (USDT) to USDⓈ, a combined Stablecoin Market, with the aim of supporting more trading pairs while offering different stablecoins as base pairs. This move goes to show that stablecoins are here to stay. However, how viable are they as investment options?
Stablecoins for the Uninitiated
Simply put, a stablecoin functions as a crypto-asset that comes with a fixed value. Stablecoins pegged to fiat currencies or to precious metals are centralized in nature. Decentralized stablecoins are ones that are cryptocurrency backed, algorithmic, or even tethered.
In you plan to invest in a stable coin pegged to a fiat currency, you need to bear in mind that the value of the stablecoin is directly linked to the stability of the fiat currency to which it is pegged. Examples of currency backed stablecoins include USD Tether (USDT), TrueUSD (TUSD), Gemini Dollar (GUSD), and Paxos Standard (PAX).
Benefits of Stablecoins
Stablecoins offer reasonable stability in the crypto market that remains largely volatile. If you feel that the market is taking a dip, you may choose to move your cryptocurrency investments to a stablecoin and wait for slump to pass.
Another instance in which stablecoins might provide to be useful is if you trade in cryptocurrencies through platforms that do not support fiat currency payments. For example, if there is an increase in the value of your crypto investment, you may be able to sell it only for a crypto currency such as Bitcoin or Ethereum. Besides, given the volatility factor, your profits could turn into losses simply because of fluctuations in value of your base currency.
With a stablecoin serving as your base currency, you are free to trade in the crypto market without worrying about devaluation. General opinion is that stablecoins work rather well with cryptocurrency exchanges. Other than being compatible with different digital assets, they also offer quicker turnaround times.
Are There Any Downsides?
The entire premise of centralized stablecoins is assurance from issuing companies that these digital assets are backed by real-world assets such as fiat currencies and precious metals. For example, Tether claims that the company has $1 for every USDT that is in circulation. This matters because you may need to exchange stablecoins for real-world assets at some point in the future.
While companies behind most stablecoins say this is how they operate, it is near impossible to tell if the information they provide is completely factual. As a result, choosing a reliable stablecoin is among the most important steps you need to take when moving in this direction.
While stablecoins are perceived to be stable, this is not always the case. With stablecoins that are pegged to real-world assets, fluctuations in prices of the assets would have a bearing on the value of the stablecoins. When it comes to stablecoins that hold their collateral in the form of cryptocurrencies, they may be prone to even more volatility in value. Then, there are ones that rely on complicated bond schemes, relying on future growth to guarantee liquidity.
Another aspect that requires attention relates to cryptocurrencies as well. While companies that provide digital investment alternatives such as cryptocurrencies and stablecoins hope to increase investor trust by seeking government approval, it becomes imperative that they follow government rules and regulations. For instance, Gemini Dollar (GUSD) and Circle’s USDC are two regulated stablecoins that require users to provide proof of identity. They also hold the right to refuse their services to individuals who have been convicted of money laundering in the past.
Here are some of the more popular stablecoins of the day that find a place on at least one prominent exchange.
- Bitshares. The company relies on an intricate system to stabilize its token BITUSD through its second token (BTS), linking one BTS to one USD. Bitshares relies on its own algorithm to keep the value of its token stable, and its stablecoin is not linked to any other asset. You may trade in this stablecoin through the OpenLedger DEX exchange.
- MakerDao. This decentralized project links its token (DAI) to the U.S. dollar, although it is not backed by the U.S. dollar. It claims to get its stability through its algorithm that moves a target price, thereby incentivizing people to trade. You may trade in this stablecoin through Bitfinex, Ethfinex, DDEX, Bancor, and HitBTC.
- Tether. Despite the controversy surrounding this company, Tether remains among the most commonly used stablecoin globally. Pegged at 1:1 against the U.S. dollar, you may trade in USDT with most altcoins, and through just about every crypto exchange.
- Digix Gold Tokens. The company that issues DGX relies on a collateralized mechanism with gold serving as its base. The value of one DGX is the same as that of one gram of gold. Its value has remained rather stable since its launch, at around U.S. $40. The exchanges you may turn to for trading in this stablecoin include Bitfinex, Kryptono, and Ethfinex.
Investing in stablecoins may be worth your while if you are looking to add some stability to your portfolio. This might also be the case if you want to make the most of your cryptocurrency investments, when time is often of the essence in carrying out trades. However, exercising due diligence in selecting the right alternatives remains crucial to the process.
Jon works with iCompareFX as a researcher. His job involves delving into the operations of leading overseas money transfer companies from different parts of the world, and he goes mystery shipping when required. When he’s not working, he’s busy discovering new music.