Stablecoins are a type of cryptocurrency that is tied to a more stable asset as the basis for its value. When people talk about stablecoins, they usually mean cryptocurrency tied to a fiat currency, especially the US dollar. Some stablecoins are instead linked to precious metals or even other cryptocurrency.
At their core, what differentiates stablecoins from regular cryptocurrency is that they are far less volatile and resemble the physical currency we’re used to.
“Its purpose is to provide stability of price as people are transacting across coins or between fiat and digital currencies because crypto markets can be volatile,” says Doug Boneparth, a financial advisor and president of Bone Fide Wealth in New York.
Just as there are many types of regular cryptocurrency, there are many stablecoins, with some being considered stronger than others.
Tether (USDT) is perhaps the most well-known stablecoin, as well as being the first, having been created in 2014. Roughly 85% Tether’s assets are cash, cash equivalents, short-term deposits, and commercial paper, according to its website.
Another popular stablecoin is USD Coin, which was launched by Circle. USD Coins is pegged to the US dollars and short-duration U.S. Treasuries with a circulating supply of $49 billion, according to Circle.
There are several other popular stablecoins, including Dai, Binance USD, and TerraUSD. These all have smaller market caps than Tether and USD Coin.
The Use Of Stablecoins
Depending on what transactions you make with cryptocurrency, stablecoins can function as a bridge between the more volatile cryptocurrencies and stable assets like fiat. By trading in stablecoins instead of US dollars, you may be able to avoid fees found on exchanges which charge for transferring between USD and cryptocurrency
For more experienced crypto traders, Stablecoins are used for staking and lending.
It is also common to use stablecoins to transfer money internationally to avoid bank fees.
It is generally not advised to use stablecoins as an investment in themselves – being pegged to one asset means that returns are rarely good.
The Future of Stablecoins
Regulation looks to be a big obstacle for stablecoins in the coming 12 months.
Like other cryptocurrencies, they are unregulated and governments have expressed concerns about their safety.
According to Time magazine, “Federal authorities such as Securities and Exchange Commission (SEC) Chairman Gary Gensler, Federal Reserve Chairman Jerome Powell, and Treasury Secretary Janet Yellen, among others, are mostly concerned about stablecoins because these types of crypto hold the most potential for future use by everyday consumers to buy things. Because of that, expect continued conversations about stablecoin regulation this year, and possibly even legislation, experts say.”
“I think 2022 will be a bigger year of regulation than any other year before,” says Boneparth. “The more mainstream crypto becomes, the more regulators and policymakers are going to pay attention to it.”
Some have suggested that the Federal Reserve may even attempt to adopt stablecoins.
Protecting Your Tether USD Coin, And Other Stablecoins
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