Stablecoins are a class of cryptocurrencies created in response to the market volatility present in the industry today.
To ensure their stability, assets back the price of each stablecoin, making the price more constant or “stable.” Assets may include anything from the local currency in your home country to another cryptocurrency, precious metal or even other investments like short-term corporate debt.
Since these underlying assets are stable, investors can be confident that each of their tokens will sell for a set amount.
The assets a stablecoin issuer holds are in “reserve,” which often means they are in a secure bank account or another safe storage facility.
For example, when considering a US-backed cryptocurrency, if 1000 tokens exist at $1 each, the token distributor should theoretically have 1000 USD held in their reserves.
The adoption of stablecoins is an important catalyst to popularize digital currencies as a mainstream medium of payment, among other uses.
Due to their price consistency, other uses that exist include, moving tokens between exchanges, derivatives contracts, consumer loans and other financial applications, lending out tokens or making payments.
These use cases are only possible since the transacting currencies are not volatile and minimize the risk of one of the parties losing asset value while engaging in a transaction.
Below we will look at some of these use cases in greater detail.
Buying Underlying Assets without Storage Fees
In some cases, such as buying a gold backed cryptocurrency, buyers can own a valuable asset without worrying about the costs of storing it.
When purchasing gold bars, users may require additional storage facilities or security systems to protect their assets, in turn adding to their regular expenses.
By purchasing a gold backed cryptocurrency (or other precious metal stablecoins), users can invest in an asset without worrying about what comes after they start holding it.
For consumers looking to purchase a big-ticket item with digital currencies, complications such as an agreed-up price may arise.
Frequently, when consumers use bitcoin to make a purchase, companies will give them a brief time window before the price needs to be recalculated based on current rates.
Alternatively, sellers may present a buyer with a range in which the asset in question is worth. The bottom line is that price volatility can make purchasing an item more complicated than necessary.
Consumers then may do well to transfer the value of the digital currency they are using to a stablecoin so price agreements can be made quicker than with a standard cryptocurrency.
Paying an employee can also be improved with stablecoins since people generally like to know how much money they will be making regularly.
For this reason, receiving payments in bitcoin or another volatile cryptocurrency can be less advantageous if prices dip following the payment.
Stablecoins allow employees to earn a stable income like a traditional paycheque while allowing employers to take advantage of the low costs and fast transaction times common with digital currencies.
A Solution for Government and Businesses
Businesses that choose to accept cryptocurrencies may open the door to cheaper payments and new markets.
Compared to credit card companies that charge a given percentage for each transaction processed, many digital currencies offer a competitively lower rate.
Additionally, government utility for stablecoins may include conditional cash transfer programs like stimulus money.
Create a Temporary Safe Haven
It is not uncommon for exchanges to only let traders buy and sell cryptocurrencies and make any fiat to crypto conversions more complex.
For this reason, it can be challenging for an investor to cash out their cryptocurrencies in the presence of a bear market.
In some cases, this may require transfers across several exchanges or for multiple days to pass before completing the transfer.
Stablecoins live on many exchanges today and are typically simple to trade on a decentralized exchange.
As a blockchain version of the dollar, they allow users to transfer their holdings quickly to protect them from some of the downside risks of dropping prices.
A Safe Way to Experiment with Blockchain Technology
With so much uncertain market, it can be hard to begin investing in a new asset class, especially with terminology unheard of to a new investor.
Since stablecoins don’t tend to fluctuate when it comes to pricing, many investors consider an investment in stablecoins a bridge into a new world of digital assets.