Should You Invest in Stablecoin?

Since Bitcoin took a 10% bath earlier this week , you might be wondering if you should invest in something less volatile like stablecoin. After all, the name of the cryptocurrency already contains the word “ stable” . But what is stablecoin and is it worth the investment? Here’s a look at how it works and how it differs from other cryptocurrencies.

What is stablecoin?

While many people invest in cryptocurrencies in the hope that they will one day supersede traditional centralized fiat currencies, cryptocurrency prices remain extremely volatile. To make them more stable, some cryptocurrencies are backed by valuable assets like paper money or commodities like precious metals or real estate (there are also more esoteric stablecoins, backed up by over-collateralized cryptocurrencies).

Basically, stablecoin is a kind of “crypto light” in the sense that it is a bridge between decentralized finance and traditional money (although the irony is that stablecoin goes against why people even get into cryptocurrency).

In addition to price stability, the advantage of a stablecoin is that it has the same advantages as a regular cryptocurrency: fast global money transfers without commissions; Confidentiality; and blockchain-based smart contracts , which, unlike regular contracts, do not need any legal authority to be enforced. As a result, stablecoins have also become a popular tool for crypto traders as they allow them to transfer money from one crypto exchange to another without much hassle.

Should you invest in stablecoin?

If you are looking to capitalize on fluctuating cryptocurrencies, stablecoin may not be for you. Stablecoin should be, well, stable , without the dizzying highs you see with conventional cryptocurrencies, as its value tends to reflect the value of the asset it is based on. As Nerdwallet explains :

Stablecoins may not be an investment like other cryptocurrencies: they were originally created to keep their prices stable and not skyrocket. For example, the US dollar coin has practically not deviated from its value of 1 dollar during its entire existence. Meanwhile, at the beginning of 2019, the bitcoin rate was around $ 4,000, but in May 2021 it was over $ 60,000. Stablecoins are best used as a form of digital money and not as a speculative investment.

This is true for other assets as well. Investing in a gold-pegged stablecoin is like betting on gold itself in the sense that if the value of gold rises, your gold-backed stablecoin will rise in value as well. The less centralized an asset (i.e., stablecoins based on other cryptocurrencies), the less this will be true.

In addition to the natural valuation of an asset, a common way to make money with stablecoins is to get interest on the loan of your stablecoins. As pointed Fool.com , interest rates on steyblkoinam very favorable, up to 25% during bull markets.

All this suggests that stablecoin is not entirely risk-free. One of the big problems is that there is no regulator that oversees the stablecoin, making it difficult to determine if the underlying asset can support the delivery of a given stablecoin. Even the most popular stablecoin, Tether, which is uniquely pegged to the US dollar, has only 3.87% of cash in its reserves, according to US News . That is why some kind of federal regulation is already at work .

Bottom line

Stablecoin is less risky than conventional cryptocurrencies, but not risk-free either. Since they are designed to provide stable prices, it may be easier to make money by lending and collecting interest on a stablecoin rather than speculatively betting on its long-term value. For this reason, you need to have a clear understanding of how the cryptocurrency markets (including regulation) actually work before investing a ton of money in them.

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