What Is A Stablecoin, How Does it Make Profit?
In this present day, where digital currency has been on the rise, different cryptocurrencies have been developed by different developers with bitcoin remaining the leading coin.
Cryptocurrency like other currencies are not stable; in the sense that it might worth a particular amount today compared to other currencies and tomorrow, it might have increased or reduced. This is where stable coins come into play; stablecoins, unlike other cryptocurrencies, are actually stable.
What are Stablecoins Really?
A stablecoin is a form of cryptocurrency that is pegged to a stable asset, such as gold or official currency. For a lot of cryptocurrency holders, stablecoins like TrueUSD and Tether have served as a safe space to escape to when it is time to exit a particular trade, shield themselves from a market crash, and make profits.
Stablecoins provide a very simple, but controversial, solution to one of the major problem for cryptocurrencies, volatility. In a market where the prices of assets keep changing, one needs an option to store their funds in a place where the values of those funds will not change; while at the same time still having the luxury of spending and transferring said funds like any other cryptocurrency.
Stablecoins function as a bridge or connection between the the two worlds; official & traditional currencies and cryptocurrencies. Stable coins allow companies have to use these centralized authorities to accept cryptocurrencies a payment methods by minimizing the risk of today’s unstable crypto market. Stable coins are created to support the majority of the coins in the market with one-to-one equivalency. Meaning, every dollar spend on a cryptocurrency is backed by a US dollar, Yen, Pound or whatever country’s traditional currency the holder is trading in. That way, the volatility of the price can be controlled. Some of the companies have unfortunately been fraught with shady deals and frauds.
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Examples of stablecoins include: True USD Gemini Dollars, Tether, and USD Coin.
Types of Stablecoins
Now, you know what stablecoins are. It is only right that we go through the types of stablecoins that are circulating in the crypto market today.
This type of stablecoin tokenize stable assets hosted on a blockchain. It serves as a digital currency that is stable, secure, and as a fast processor of daily transactions. Asset-collateralized stable coins are 100% guarante an exchange of 1:1 for the underlying asset
Non-Collateralized stablecoins are not backed by any traditional or crypto asset; but rather maintain their value by its holders’ expectation or even speculations. There is only one existing Non-Collateralized stable coin in the market at this moment; Seigniorage.
Advantage of Stablecoins Over Other Cryptocurrencies
- By eliminating the fluctuations that can occur, it makes daily transactions easy.
- With the feature of being able to keep asset without losing value, it gives investors the safety to hold currencies for a long period It can lead to the adoption of cryptocurrency by the masses.
How Investors Make Money / Profit from Stablecoins
Basically, investors make a profit from stablecoins by hoping that the following statements are true:
- That many cryptocurrency exchanges will use their stablecoin, as many exchanges do not provide a way for people to deposit FIAT money. And, that’s why people often use Stablecoins to “park” their money short-term on exchanges, when trading between Cryptocurrencies.
- That because Stablecoins provide such a cool service on exchanges, they will be used by lots of people, which in turn increases demand. And the increase in demand will cause the bondholders to be paid the newly created coins, and the shareholders are also given the new coins which they can, therefore, sell for profit.
- That the initial purchases of the shares will help to hold the price stable for a long enough period, for them to successfully cash out their investment.
That the demand for that Stablecoin will rise for a long period since that means that they can sell the newly issued coins for a long time, and make them a good return on their investment.
Stablecoins provide a bridge between the world of fiat and crypto, as well as a place for investors and traders to store their assets to escape the volatility of the crypto market. However, it seems a lot of users are dependent on stable coins, which might be dangerous for the crypto world in a situation whereby it crashes. Just like everything in life, there are always advantages and disadvantages.