
What Are Stablecoins?
For investors interested in gaining exposure to cryptocurrency but worried about rampant volatility, stablecoins may be worth a look.
While cryptocurrencies such as Bitcoin and Ethereum have disrupted the way many investors interact and think about money, traditional investors may opt to steer clear as prices can change drastically from one moment to the next.
Stablecoins, on the other hand, are less subject to volatility. Stablecoins are cryptocurrencies that are backed by an asset, most often a fiat currency. They maintain much of the appeal of other cryptocurrencies, however, allowing investors access to a new and evolving asset class.
Here’s what you need to know about stablecoins:
- What are stablecoins?
- Fiat-backed stablecoins.
- Crypto-backed stablecoins.
- Commodity-backed stablecoins.
- How to use stablecoins.
- How to make money with stablecoins.
What Are Stablecoins?
A stablecoin is a digital currency that is linked to an underlying asset such as a national currency or a precious metal such as gold. The main types of stablecoins include fiat-backed, cryptocurrency-backed and commodity-backed stablecoins.
“Stablecoins are a type of cryptocurrency that are designed to maintain a fixed value, often pegged to a fiat (government-backed) security,” says Adam Lowe, chief innovation officer of CompoSecure, designer and manufacturer of premium financial cards.
Cryptocurrencies are a new asset class evolving rapidly in an increasingly tech-driven economy. As a consequence, cryptocurrencies are subject to major volatility, which can change their value in a matter of seconds.
“With a centralized third party, the organization that created the stablecoin entity, you have to trust that they have the corresponding dollars they issued the stablecoins for,” says Mike Scanlan, co-founder and chief technology officer at CoinMover, a cryptocurrency ATM operator.
Fiat-Backed Stablecoins
Popular fiat-backed stablecoins include Tether (USDT), which is backed one-to-one on the U.S. dollar. Tether is the first stablecoin that came to market and the most used and adopted stablecoin with the largest market capitalization. USDC is another stablecoin backed by the U.S. dollar. It was launched in 2018 by Coinbase and Circle. These are centralized stablecoins, which means the stablecoin is held by an entity or exchange. In the case of USDC, this stablecoin is managed by Circle and Coinbase.
One of the risks with stablecoins that have a central authority is trusting that they can maintain their supply of dollars equal to the supply of stablecoins. This can be seen as going against the concept of decentralization.
“With a centralized third party, the organization that created the stablecoin entity, you have to trust that they have the corresponding dollars they issued the stablecoins for,” says Mike Scanlan, co-founder and chief technology officer at CoinMover, a cryptocurrency ATM operator.
The concern is the third-party entity shaping the value of the stablecoin, Scanlan says.