Stablecoins are stable assets that can be used as a store of value or medium of exchange in online transactions. However, how can they make you money?
T.C. Gunter · Follow
Published in · 5 min read · Aug 30, 2021
You might have heard the word Bitcoin thrown around in casual conversation, or perhaps even the word cryptocurrency. However, stablecoin might not be a word that you’ve heard at all. Of course, there are commodities, fiat, and cryptocurrencies, but what does that make stablecoin? Where does it fall in the financial scheme of things?
A stablecoin is a digital currency backed by a fixed asset such as gold or fiat currency. Initially, people used stablecoins to buy other cryptocurrencies. At the time, many cryptocurrency exchanges did not have access to traditional banking. Additionally, their benefit over country-issued currencies was you could use them 24 hours a day, seven days a week, anywhere in the world without banks. Another benefit was their use of smart contracts in a blockchain.
“Smart contracts have given rise to the use of stablecoins not only in seamless trading but also lending, payments, insurance, prediction markets and decentralized autonomous organizations — businesses that operate with limited human intervention.” — The Conversation.
So, stablecoins act as a bridge to connect cryptocurrency and fiat to perform many valuable functions. Naturally, therefore, you need to know what’s going on with them.
Below, we’ll list 5 of the most widely asked questions about stablecoins and give the answers so you can use your newfound information to impact your portfolio with some positive gains.
Although we’ve brushed over the definition, let’s be sure we’re clear on the concept.
A stablecoin is a digital currency backed by either fiat or physical assets. This gives them unique benefits compared to traditional money, such as that they can be used 24/7 worldwide without having to use banks and are available at all times of the day.
Stablecoins first came into use in 2015 with Tether (USDT). They were initially launched as a response to cryptocurrency volatility. The volatility of crypto made it difficult for traders and investors to use it in transactions. However, stablecoins have become famous for other purposes, such as stable payments supported by blockchain technology without volatility along with the lending above, etc.
Now, there are several stablecoin offerings such as:
- USD Coin (USDC)
- Binance USD (BUSD)
- Dai (DAI)
And many more.
So, stablecoins seem worthwhile but wait a second. Why are stablecoins so stable beside the backing of fixed assets like gold or the US dollar? Well, they have central authorities, don’t they? Yes.
No.
Many stablecoins have recently come onto the marketplace and offer stable value in comparison to cryptocurrencies. However, they are not decentralized — which is an element cryptocurrency lacks. Stablecoins are stable because they usually have a fixed value (in USD or an equivalent fiat currency) to ensure that the price does not fluctuate due to speculation, leading to significant profits on either end for those trading stablecoins. Despite this stability, a stablecoin is still dependent on a stable economy, which can be threatened by instability in its development.
Significant drawbacks to a centralized currency are as follows.
- You are at the mercy of the stability of the authority
- They are not transparent
- The community can’t audit them
While these are unattractive traits to cryptocurrency enthusiasts, stablecoins have benefits and a place in the new financial landscape.
Previously, we spoke about how stablecoins can be backed by gold or the US Dollar, but many more traditional assets support them. In fact, money market funds, cash, commercial paper, corporate and municipal bonds, and certificates of deposit by foreign banks back USD Coin.
The SEC Chairman believes if any security backs a digital currency, then that currency is a security as well. However, stablecoins are not considered a security by law, and the legal battles in the courts rage on regarding the contention over it. In short, no. Stablecoins are not considered securities. But, if there are digital casualties in those battles to come, I don’t believe stablecoins will be the first to fall.
Understand, my take on the subject is bleak, but I don’t espouse the death of stablecoin. It is merely that the regulation and treatment will change and move it away from the more attractive aspects of cryptocurrency. And that might be fine for your portfolio. In fact, it might even be a boon.
Let’s move on and look at some other properties of stablecoins so you can determine how to use them to increase your earnings.
Yes.
Stablecoins have mining rewards like Bitcoin or Ethereum. Also, stablecoin is considered a cryptocurrency by many financial experts because it uses blockchain technology which underpins other types of coins. Additionally, stablecoins can be audited to show that their assets are held in a designated bank account.
This is another reason stablecoins are considered more stable than a cryptocurrency like Bitcoin because mining rewards indicate supply and demand to distribute stablecoin among the participants in the network. Of course, all stablecoins have this, but they also have other attributes that make them attractive for earning profits or income based on stablecoin’s value.
No.
Stablecoins carry the same attributes as other cryptos and thus are not insured by the government. So, until Congress passes legislation categorizing stablecoin, it will remain uninsured. However, it still possesses the attractive non-volatility that crypto doesn’t enjoy. So, you can use it as a low-risk waystation while you move your money around between other crypto investments.
Stablecoins possess great utility for stabilizing your value while you make your next investment decision. Moreover, various centralized authorities back them providing non-volatility and a measure of resilience to crypto market whims. Thus, while stablecoins miss out on the more attractive features of other cryptos, such as decentralization, anonymity, and personal control, their utility is difficult to ignore if you are serious about crypto investing.
Anything can happen to swoop in and change the cryptocurrency landscape with government regulation looming on the horizon. Still, today is a great day to take advantage of these utility coins to solidify your gains while moving your money around and keeping it out of liquidity.
So, think about stablecoins for your next investment moves.
Are you going to use stablecoins in your portfolio?
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