Navigating Stablecoins As A Crypto Trader

Stablecoins have become deeply ingrained in the crypto ecosystem over the past several years. Stablecoins are digital representations of fiat currencies that come in many forms.

The purpose of these coins is to resist volatility. Other cryptocurrencies, like Bitcoin, go up in price.  Stablecoins, on the other hand, remain pegged to a certain value, providing stability. There are many different kinds of stablecoins.

Fiat-Collateralized Stablecoins

Fiat backs fiat-collateralized stablecoins. The most well-known example is USDC, which the US dollar backs. To deposit funds into a USDC wallet, US dollars are deposited into a designated financial institution’s account. Circle then issues an equal amount of USDC to the user’s wallet on the blockchain.

Fiat-collateralized stablecoins are easy to use and supported by nearly all crypto platforms, but may not remain genuinely stable.

Crypto-collateralized Stablecoins

Cryptocurrencies locked in smart contracts back crypto-collateralized stablecoins. For example, if you deposit $10m eth into a contract, there can only be $10m worth of that stablecoin.

Crypto-backed stablecoins include DAI, Magic Internet Money, USDP, and GTON Capital dollar. To use GCD as an example, the stablecoin maintains a soft peg to the dollar by underpinning its value to a basket of using ETH, BTC, and PAXG, and other liquid currencies.

Algorithmic Stablecoins

An algorithmic stablecoin uses an algorithm to manage the supply of coins in circulation, stabilizing the price.

This system issues new coins when there is demand in the market,  removing them from circulation when they are no longer needed. Algorithmic stablecoins aim to keep their value at a fixed number rather than fluctuating with supply-and-demand forces.

Which Kind Is Best?

Although it is hard to choose which stablecoin is the best, as they each have unique benefits, the main thing to look for in a stablecoin is liquidity. The coins that have the highest market cap, like Tether’s USDT, Circle’s USDC, and Binance’s BUSD, have the most liquidity and are available on all major platforms and exchanges.

Because a stablecoin is designed to keep its price stable relative to other assets like the US dollar, they are useful as an alternative to conventional currencies, and play an important role in the crypto ecosystem.