Lite guide to stablecoins for new investors and traders

Cryptocurrencies are popularised by its volatile assets like Bitcoin (BTC) and Ethereum (ETH) but these aren’t the only ones available. There are also stablecoins like Tether (USDT) that serve as a pillar in the crypto economy and its adoption. Its role and function are different from its altcoin counterparts but they are equally promising as investments. 

Investing in stablecoins requires a different set of knowledge from altcoin or token trading. Fortunately, it’s a lot simpler than most digital assets. Here is a Gamdom guide for everything you need to know about stablecoins from how it works to its advantages and disadvantages as a cryptocurrency:

Factors that define a stablecoin

A stablecoin is a cryptocurrency, meaning that it’s circulating a blockchain and it can be minted or mined and burned to control circulation as well as inflation. However, a distinct line is placed between it and altcoins for various reasons including but not limited to trading. Its two defining factors are how its price is expected to be in the market and the method used to make that happen. 

Stable price

The easiest description for stablecoin is that it has a stable price, hence its name. What that means is how it will remain within a specific value relative to another, usually more popular asset. This means that the stablecoin is always going to be within the same value relative to that asset. The most common ratio is 1:1 like Tether for the United States dollar but some assets are a fraction of that asset to serve as a more accessible denomination.

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Backing or value pegging

Should you invest in stablecoins, you will need to have a deeper understanding of how it maintains its value. There are four known methods right now in the crypto industry. Each one defines the stablecoin investment and how people see its future in the modern economy. 

Fiat-backed

A fiat-backed stablecoin means that the currency is a representation of a specific legal tender, usually a country’s money. The most popular choice for this is the United States dollar as in the case of Tether with the market ticker ‘USDT’. There are also stablecoins backed by Euro, Japanese yen, and many other currencies. 

The most important condition in a fiat-backed stablecoin is the existing reserves to cover all of it. Issuers need to have enough of the backing currency to cover the stablecoin. That means if the total existing USD-backed stablecoin is a million, then they need to have a million USD in their bank, ready to buy back all crypto in circulation. 

Crypto-backed

Some stablecoins are backed by cryptocurrencies, meaning that they are also susceptible to the asset’s volatility. The stablecoin is almost always 1:1 but it can also be half or a fraction of valuable assets like Bitcoin (BTC) to make it more accessible. It seems counterproductive at a glance but there’s a reason for this kind of stablecoin. 

A crypto-backed stablecoin is meant to let users transfer their assets on a network that doesn’t interact with a certain cryptocurrency and its blockchain. This is the case for Bitcoin with the Ethereum network. Therefore, some decentralised applications (dApps) offer wrapping services, turning your BTC into an ERC-20 token called a Wrapped Bitcoin (wBTC). This allows using BTC as a traceable asset or as payment on the Ethereum blockchain and its smart contracts. 

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Commodity-backed

The word ‘commodity’ generally refers to all kinds of goods from coffee to copper but a commodity-backed cryptocurrency only uses store of value assets. That means silver, gold, platinum, and palladium. A stablecoin backed by commodity is worth a certain weight of that asset like Pax Gold (PAXG) where a token is worth one out of 400 troy ounce of a London Good Delivery bar of fine gold. Like other stablecoins, that means that issuer Paxos Trust Company needs to own enough London Good Delivery gold bars in reserves to cover all PAXG. 

Algorithmic

An algorithmic stablecoin is as volatile as an altcoin but it retains its value by burning or minting. The decision on when to do this and by how much is decided by an on-chain algorithm and the value of a reference asset. This means that an algorithmic stablecoin can be worth equal to Bitcoin but only by how it controls supply and demand, not by reserves. 

This kind of backing method is controversial among investors because it’s usually undercollateralized. Dai (DAI) is a great exception to this because it is collateralised by crypto assets locked in smart contracts.  

Advantages of a stablecoin

The purpose of stablecoins varies in the crypto trading industry based on what their issuers intended them to be used for. However, they all share two major characteristics that make them advantageous for traders and investors alike such as the following:

Comes with all the benefits from a blockchain

The most important factor that makes stablecoins useful is having all the benefits of blockchain technology. Its ownership and circulation are protected by cryptography as well as the speed and cost-effectiveness of a peer-to-peer (P2P) payment model. This is great for all kinds of cross-border transactions like online trading and remittances. It’s the benefit that made it popular among institutions that require international banking. Individuals also use stablecoins for the same purpose if their job or passion requires them to travel around the world. 

High liquidity for all kinds of exchanges

Stablecoin is extremely useful in crypto trading because of its high liquidity. It means it’s easier to convert to any asset, both fiat and altcoin alike. Every stablecoin can be easily swapped for its reference asset, like USDT to USD, on many exchanges, especially from their issuer. The most popular use for stablecoin is with traders buying them using altcoin at decentralised exchanges (DEX) then going to centralised exchanges (CEX) to swap for fiat. 

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Disadvantages of a stablecoin

Though stablecoin as a concept is generally accepted, there are a few concerns that the crypto industry typically addresses. Here are two broad examples of disadvantages of stablecoin:

Typically centralised

The biggest appeal Bitcoin and Ethereum had is their decentralised nature. That means there is no higher authority dictating its flow nor will the asset lose value if that central entity falls. Stablecoin always has a central authority to manage it. Unlike fiat, the issuer is a private company or corporation that can cease to exist at any moment. It’s also possible that they mismanage their reserves which will drop stablecoins’ values significantly. 

Transparency is frequently questioned

Issuers need to maintain their customers’ trust by providing financial reports as proof of reserves to indicate that they can cover all of their issued assets. However, investors are worried that such reports are manipulated by omitting liabilities in auditing. Stablecoin users need to trust the issuer but this can be improved through auditing issued by credited companies or an improvement in the proof of reserves (PoR) system. 

Top stablecoins to invest in

If you are looking for the best stablecoins to invest in then it’s better to stick with the popular ones for the sake of access and liquidity. Here are some of the top digital assets to add to your trading portfolio:

Tether (USDT)

Asking ‘what are stablecoins?’ on the internet is always given USDT as the prime example. It’s a USD-backed stablecoin with the highest support rate on exchanges and swap services alike. Tether is also often the only stablecoin supported by various gambling sites like Gamdom because of its high liquidity. 

Binance USD (BUSD)

BUSD is also a great stablecoin for crypto traders. It is popularly used for people buying and selling cryptocurrencies on DEX platforms because BUSD can be instantly swapped for USD at Binance. It is also fairly volatile on a micro scale, giving holders at least 0.04% return which can add up if you have a lot of it. 

Dai (DAI)

DAI is the prime example of a centralised stablecoin with a transparent crypto-backing method. It comes with all the remittance benefits of a standard stablecoin while also holding up as a hedge against market volatility for traders. DAI is typically used in money lending using smart contracts on Ethereum where dApp developers are active and always in need of a loan. 

Is stablecoin a good investment?

The easiest answer to ‘why invest in stablecoins?’ is that it is extremely helpful in the current state of the economy. Stablecoins bring the best of both fiat and crypto. It has a maintainable market value, making it easy to trade for any asset or sell for currency like converting from one fiat to another. Stablecoins are also circulating blockchains, allowing them to be used on smart contracts in which fiat cannot be used on. 

It’s also worth investing in USDT primarily to use in gambling at Gamdom. Not only is it easy to cash out and trade but it’s also usually the cheapest money to use in gambling. Thus, it’s not as daunting to use in betting at a casino or sports betting market compared to BTC, ETH, and LTC. 

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Words: Clarence Clarke