February 18, 2022

Stablecoins Guide

Carla McMorris
Director of Content

Stablecoins Bring an Element of Price Stability to Cryptocurrency

Cryptocurrency has exploded in popularity, both as an investment opportunity and as an alternate way of paying for goods and services. Still, price fluctuations in cryptocurrency can be unsettling to its owners, that’s why many are opting to buy and hold stablecoins, which offer a less volatile cryptocurrency option.

What are stablecoins?

Stablecoins are a type of cryptocurrency. Cryptocurrency is a collection of data that functions as a medium of exchange, and as an alternative to state-issued currencies such as the U.S. dollar. The records of who owns each crypto ‘coin’ are stored in a digital ledger, typically a blockchain. Because cryptocurrency is decentralized, meaning it is not issued by a central authority such as a government’s treasury, many users see the currency as working to promote greater financial democracy.

A stablecoin is a cryptocurrency that has its value pegged to another currency, such as a fiat currency like the U.S. dollar. For example, the USD Coin cryptocurrency (ticker USDC) strives to keep its value close to one U.S. dollar. The value of some stablecoins is even pegged to other cryptocurrencies. The benefit of stablecoins’ predictable value makes them more appealing for consumers looking to use cryptocurrency as a source of payment. 

Generally, the entity behind a stablecoin creates a reserve that holds the asset, or group of assets, that back the stablecoin. Thus, a dollar-backed stablecoin may hold $1 million in reserve to back up one million stablecoin units. Most other cryptocurrencies are not backed by any currency or other asset. 

The supply of stablecoins is growing rapidly — rising to nearly $150 billion as of January 2022, compared with just $35 billion a year earlier, according to The Block website.

What are some of the assets stablecoins are pegged to?

Different stablecoins are pegged to various underlying assets. They include:

  • Fiat currency: - Many stablecoins are pegged to currencies including the U.S. dollar or the Euro. Examples include Tether, known as USDT, and USD Coin. 
  • Precious metals: The value of some stablecoins is tied to the value of precious metals including gold and silver. Examples include Digix Gold Token (DGX) and Perth Mint Gold Token (PMGT). 
  • Other cryptocurrencies: Some stablecoins use other cryptocurrencies as collateral. Examples include Dai (DAI), which is pegged to the U.S. dollar and runs on the Ethereum blockchain.
  • Algorithmic Stablecoins: These stablecoins are not pegged to fiat currency or any other assets. Their price is kept stable by adjusting the market cap of the outstanding coins in response to price moves. If the stablecoin price falls the total supply will automatically be adjusted downward, and if the price rises more tokens will be created. An example is Ampleforth (AMPL).

Why do people buy and hold stablecoins?

Many cryptocurrency traders use stablecoins as a way to keep their money invested in a cryptocurrency exchange and easily move in and out of other cryptocurrencies. Stablecoins can be used to transfer money between cryptocurrency exchanges or to other users. They are also a way to hold cryptocurrency that fluctuates less in value than other coins.

Stablecoins can also be used for payments, helping payers avoid fees often levied for credit card purchases or transactions that take place across borders.

What are the benefits of stablecoin?

As described above, a stable price makes stablecoins more appealing to users looking to use them as currency. Stablecoins can be transferred to others easily, without the need for a bank account, including fast overseas transfers with minimal transfer fees. 

Other benefits include enjoying the same benefits of credit card transactions without card fees that can run 3% or higher per transaction.

Some cryptocurrency owners can use their stablecoins for crypto staking, where owners agree to “lock-up” their coins for a period of time to earn interest on the coins. By staking or locking up coins, owners can help the network validate and execute other transactions. Users can stake stablecoins on exchanges including Coinbase and

How can users buy and hold stablecoins?

Similar to other cryptocurrencies, stablecoins can be purchased on cryptocurrency exchanges such as Coinbase. Because you don’t need a bank account to buy stablecoins, that could make the cryptocurrency more attractive to underbanked individuals. Still, users do need a crypto wallet to buy, sell, trade and hold stablecoins, similar to other cryptocurrencies. 

Are there any downsides to stablecoins?

Some have questioned whether stablecoin entities really own the collateral they claim to hold. 

In a worst-case scenario, if the reserves are insufficient it could shake confidence in the coin or cause it to drop in value.  

Stablecoin Tether and cryptocurrency exchange Bitfinex, owned by the same parent company, agreed to pay $18.5 million in fines to New York after the state’s attorney general investigated Tether’s claims that its virtual currency was fully backed by U.S. dollars. 

Stablecoins are also facing additional government scrutiny, with the Biden administration in late 2021 calling for stricter government oversight of stablecoins. 

Also, holding stablecoins will not be attractive to investors seeking cryptocurrency that may appreciate. 

Synapse’s Crypto Hub helps cryptocurrency innovators keep pace in this highly competitive market. If your business needs support to bridge modern payment solutions between you and your customers, we’re here to help.

Stablecoins Guide

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Carla McMorris
February 18, 2022

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