If there’s one thing that has defined the history of cryptocurrencies up to this point, it’s volatility. Bitcoin and other cryptocurrencies seem to be on a constant roller coaster ride between all-time highs and sudden crashes down to prices at half of those peaks or lower. However, a new kind of cryptocurrency investment opportunity could be changing that.
What Is a Stablecoin?
Stablecoins are cryptocurrencies that have been created with the goal of staying at a stable price point. They aim to provide a viable option as a currency or as a store of value rather than a speculative investment like other cryptocurrencies.
Their values can still fluctuate to some degree, much like how national currencies can vary in purchasing power over the years due to inflation. However, these price changes are nothing at all like those seen in conventional cryptocurrencies. With stablecoins, you can trust that your coins will be roughly the same value tomorrow as they are today.
This makes stablecoins more useful as an actual currency. When Bitcoin was first established, it was thought of as a digital currency that could provide secure decentralized transactions. Today, people buy Bitcoin because they think the price will increase in the future. Stablecoins are trying to realize that original goal.
Why Invest in Stablecoins?
At first glance, stablecoins might not seem like a good potential investment. By definition, they’re trying to stay at roughly the same value. You won’t generate any losses on your investment, but you won’t make any gains either. However, there are other ways that investing in stablecoins can generate a profit.
Stablecoins see a lot of use in crypto lending and provide opportunities for investors there. There are many different crypto lending platforms out there with various models. Some allow investors to back specific loans and derive profit from loan payments, while others are more like how the money in your bank account generates interest. In either case, the absence of massive financial institutions means that you make more money faster.
Many stablecoins use the newer proof-of-stake system rather than that proof-of-work model that’s behind Bitcoin’s energy use issue. This proof-of-stake system lets you stake your cryptocurrency holdings to generate additional wealth by setting them aside for some period of time.
Investing in stable assets directly is an important part of many investment strategies. The stability of a stablecoin’s price could be exactly why you want to invest in it, providing a safe place to keep money where its value can be reliably stored. During periods where other investment assets are falling in price, simply keeping what you already have is a victory.
It is however important to differentiate between legitimate Stable Coins that offer proof-of stake and services such as the Immediate Edge crypto trading bot which claims to offer Stablecoin contracts to investors, but in fact do not.
How Does a Stablecoin Actually Work?
You can’t simply declare that some cryptocurrency is going to have a set price and expect everyone to go along with it. For stablecoins to work, there needs to be something that’s actually causing the price to hold steady.
Most stablecoins are backed by some other asset. Tether (USDT) is a cryptocurrency that is backed by US dollars. The value of USDT stays very close to the US dollar, typically within a few hundredths of a cent. In theory, anyone can exchange a USDT for a real US dollar with Tether Limited at any time, so the price holds steady.
Stablecoins don’t have to be backed by fiat currencies. They can also be backed by commodities like gold, silver, or even real estate. Some are backed by other cryptocurrencies, holding a steady price relative to that particular cryptocurrency.
Crypto investors have a new option to consider now that stablecoins are becoming more widespread. By bringing something new to the table, stablecoins are providing more versatility to investors in developing their strategies.