What are stablecoins?
Stablecoins are cryptocurrencies that are somewhat stable and are linked 1:1 to a currency that we currently use a lot. In most cases, this is to the United States Dollar (USD). There are even stablecoins that are equal to the price of gold, silver or platinum. Currently, there are several stablecoins available on different exchanges. Behind every stablecoin, there’s a company which makes sure that for every issued currency there’s a dollar (or another fiat currency) on the bank. These companies bear the responsibility of actually owning the assets themselves.
Which stablecoins are available?
- USDT (Tether): 1:1 backed by the dollar. The largest company with the largest market share and is suspected of market manipulation and lack of underlying assets (rumors).
- USD Coin (USDC): 1:1 backed by the dollar. Fully transparent and regulated by financial institutions. Issued by Coinbase and Circle.
- Binance USD (BUSD): 1:1 backed by the dollar. Fully transparent and regulated by financial institutions. Issued by Binance and PAXOS.
- PAX (PAXOS Standard): 1:1 backed by the dollar.
- DAI (Maker): 1:1 backed by the dollar. Decentralized!
- GUSD (Gemini Dollar): 1:1 backed by the dollar.
- EURS: 1:1 backed by the euro
- SGDR: 1:1 backed by the Singapore dollar
What are stablecoins used for?
Traders use stablecoins to quickly switch to fiat. It is often not possible to quickly switch from Bitcoin to Dollar or Euro on an exchange. To do this, the Bitcoin must first be withdrawn and converted to Euros via a broker. But in the fast crypto market, you need to be able to trade fast. If a trader expects the price of Bitcoin to drop, he can buy Bitcoin for the current dollar price.
Example: 1 BTC currently costs exactly 8000 USD, and you expect the price to drop. You can take a position in a stablecoin and convert 1 BTC to 8000 USDT. If the BTC price drops to 7000 USD, then you can buy 1.14 BTC again with your 8000 USDT. This means a 0.14 BTC profit.
The advantages of stablecoins
- You always have a stable price when trading
- You can take a break by going back to USD
- Ability to protect your position
- Escape the volatility
- Earn an interest on your stablecoin holding
- Some companies behind a currency are not transparent and may not have the underlying assets at their disposal
- Companies behind a currency can manipulate the market by printing new coins and issue them without having the underlying assets (only when the company is not transparant).
- There’s a central company behind the coin
- Although the currency must be equal to USD 1, it can sometimes differ by a few percent