When you hear cryptocurrencies, you probably think of Bitcoin, Ethereum, Cardano, Litecoin or the like instead of stablecoins.
But in the world of cryptocurrencies, these particular coins perform an important function.
The world of cryptocurrencies is characterised by strong fluctuations due to political and economic influences. Well-known figures like Elon Musk, for example, have caused the Bitcoin to either shoot up or plummet through simple tweets.
An interesting phenomenon is that the prices of altcoins (Ethereum, Cardano, Algorand, etc.) often follow the direction of Bitcoin.
Especially the cryptocurrencies with the highest market capitalisation (market cap) often follow Bitcoin’s direction.
Stablecoins are unaffected by these movements. They always have the same value, hence the name “stable”.
What is the point of stablecoins?
The purpose of these stable cryptocurrencies is to make payments as well as to have a stable “intermediate port” as a hedge when you are not currently invested in volatile cryptocurrencies.
This is because a swap from, for example, Ethereum into USDT is cheap, while a swap from Ethereum into euros but also into US dollars is associated with higher fees.
Stablecoins are also ideal for risk-averse investors to protect their assets against inflation-prone economies.
Why do stablecoins remain stable in contrast to Bitcoin and the altcoins?
The stablecoin is subject to a different value depending on the specific coin and can be divided into three categories.
- Commodity-linked
- Fiat-bound
- Crypto-bound
Commodity-linked stablecoins
Commodity-linked coins are backed by commodity-based assets such as gold, silver or palladium. An example of such a cryptocurrency is the Digix Gold Token (DGX).
Advantages
- Relatively stable
- Easy to understand
Disadvantages
- Commodities are dependent on the current economic situation
Fiat-linked stablecoins
These are pegged to classic currencies such as the US dollar. One of the best-known stablecoins is the USD Tether (USDT).
Advantages
- Stability
- Easy to understand
Disadvantages
- Centralised and therefore vulnerable
- The central authority must be trusted
Crypto-linked stablecoins
The crypto-linked stablecoin stands behind various cryptocurrencies and crypto portfolios. Through this mix, it keeps its value stable. One such example is the Wrapped Bitcoin (WBTC).
Advantages
- Decentralised
Disadvantages
- Higher volatility possible
- More complex to understand
Conclusion
Stablecoins have a practical use and can be used as a tool in crypto trading as well as for currency hedging.
They are characterised by their stability and low transaction fees.
The fact that central banks are currently working on their own coins shows that they will only become more important in the future.
