A stablecoin is a cryptocurrency that is linked to a real equivalent, such as a national currency. This is usually a stable and quite predictable equivalent value, which ensures that the cryptocurrency price is also stable. Stablecoins are considered to be relatively low-risk as they have very low volatility, especially compared to other cryptocurrencies.
Many cryptocurrencies are characterized by a strongly fluctuating exchange rate. Bitcoin is considered by investors and traders as an opportunity to invest money. And as with many other investment products, BTC value changes depending on supply and demand.
It’s possible that the value of a token doubles within a month and then collapses again shortly afterwards. Anyone who wants to use such a volatile cryptocurrency as a means of payment always faces the problem: the purchasing power of tokens can change quickly. For example, if the bitcoins earned were worth 10% less the next day, it would be extremely unprofitable for companies.
Stablecoin May Be the Solution
Still, there are also cryptocurrencies that remain significantly more stable and therefore their future price is more predictable. The collective term ‘stablecoin’ refers to cryptocurrencies whose value is firmly linked to a real equivalent, e.g. with the price of US dollar, euro, or gold. These real equivalent values are normally subject to only relatively small fluctuations.
In addition, stablecoins can usually be converted directly into the linked equivalent. In the case of Tether cryptocurrency, the price of one USDT always corresponds exactly to the price of one US dollar.
It’s also possible to link a stablecoin to another cryptocurrency. Here, however, there is still the problem that highly volatile rates of the linked currency also affect the stablecoin. Further measures must therefore be implemented in order to keep the rate stable.
Key Advantages of Stablecoins
Due to the close connection to a real value, money can be exchanged for a stablecoin with comparatively little risk. Stablecoins aren’t volatile because they usually follow the price of their associated value very precisely. Thus, investors can use them to store value. This means that you can convert the desired sum into a stablecoin and be confident that the price won’t develop spontaneously in an unpredictable direction. The exchanged amount doesn’t have to be strictly monitored in order to minimize losses due to falling prices. Each token is always exactly one unit of the linked real equivalent value.
Holding assets in the form of a stable cryptocurrency makes sense if you want to make frequent transactions with a rather volatile currency. Because on most exchange platforms, the exchange between two cryptocurrencies is cheaper and faster than the exchange between fiat money and cryptocurrency. In this way, the exact amount of stablecoins required for the respective transaction can always be exchanged for another coin. Likewise, loans in another cryptocurrency can be converted into stablecoins for value storage. In this way, a loss of value can be avoided.
Stablecoins also serve as an independent means of payment on the international market. They enable fast digital payments worldwide without any obstacles relating to fluctuating exchange rates.
What other pros of stablecoins do you know? Feel free to share your knowledge in the comments!