February 18, 2022
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.
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.
Different stablecoins are pegged to various underlying assets. They include:
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.
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 Crypto.com.
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.
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.
The rich text element allows you to create and format headings, paragraphs, blockquotes, images, and video all in one place instead of having to add and format them individually. Just double-click and easily create content.
A rich text element can be used with static or dynamic content. For static content, just drop it into any page and begin editing. For dynamic content, add a rich text field to any collection and then connect a rich text element to that field in the settings panel. Voila!
Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.
