The cryptocurrency market has been known for its volatility, with prices fluctuating in hours. This unpredictability has made it challenging for more potential investors to look up the market, especially those who are reluctant to take risks. However, there are cryptocurrencies that offer a safer and more stable investment option called stablecoins.
What are Stablecoins
According to M. Mita, K. Ito, S. Ohsawa and H. Tanaka, "What is Stablecoin?: A Survey on Price Stabilization Mechanisms for Decentralized Payment Systems," 2019 8th International Congress on Advanced Applied Informatics (IIAI-AAI), Toyama, Japan, 2019, pp. 60-66, doi: 10.1109/IIAI-AAI.2019.00023. Stablecoins are cryptocurrencies with price stabilization mechanisms to match the price of another currency with lower volatility relative to a fiat currency, such as the US dollar. They achieve this stability by being backed by a reserve of assets, which can include fiat currencies, commodities, or other cryptocurrencies. This reserve acts as collateral, ensuring that the stablecoin's value remains pegged to the underlying asset.
Key points about how stablecoins work
Pegging to an asset: The core principle is to link the value of the stablecoin to a stable asset, usually a fiat currency like the US dollar, ensuring its price remains relatively constant.
Reserve system: To maintain the peg, the issuer of the stable coin holds a reserve of the underlying asset, meaning for every stable coin created, they have an equivalent amount of the fiat currency stored in their reserves.
Minting and burning: When someone wants to buy a stable coin, they essentially "mint" a new token by depositing the equivalent amount of fiat currency into the issuer's reserve; conversely, when someone wants to redeem their stablecoin, they "burn" their token to receive the corresponding fiat currency.
Types of stablecoins
Fiat-backed: Most common type, where each stablecoin is directly backed by a corresponding amount of fiat currency held in reserve.
Commodity-backed: Backed by the value of a physical commodity like gold, where each stablecoin represents a certain amount of the commodity held in reserve.
Crypto-backed: Backed by other cryptocurrencies such as Bitcoin, Ethereum, etc held in reserve.
Algorithmic stablecoins: These stablecoins use sophisticated algorithms to dynamically adjust their supply in response to market fluctuations, aiming to maintain the peg. However, this approach is often viewed as riskier due to the potential for instability.
Stablecoins benefits as an attractive investment option
Price stability: Unlike volatile cryptocurrencies, stablecoins offer a reliable store of value due to their peg to a fiat currency.
Low Volatility: Unlike other cryptocurrencies, stablecoins are not subject to the same level of market volatility, making them a safer investment option.
Liquidity/ Facilitates cross boarder payments: Stablecoins are widely accepted and can be easily exchanged for other cryptocurrencies or fiat currencies such as South African Rand, Kenyan Shilling, Zambian Kwacha etc.
Diversification: Stablecoins provide a low-risk investment option, allowing investors to diversify their portfolios and reduce their exposure to market volatility.
Potential risks of stablecoins
Centralization concerns: Most stablecoins are issued by centralized entities, raising questions about trust and transparency regarding reserve management.
Redemption risk: If a large number of users try to redeem their stablecoins simultaneously, the issuer may not have enough reserves to fulfill all redemption requests.
Regulatory uncertainty: The regulatory conditions surrounding stable coins is still developing, potentially creating legal risks.
Investing in Stable coins
Investing in stablecoins is a straightforward process. Investors can buy stablecoins on Binance, such as;
#USDT (Tether) USDT PRICE
USDT (TETHER) ICON
#USDC (USD Coin) USDC PRICE
USDC ICON
These stablecoins can then be held in a wallet or used to earn interest through various investment products.
Earning Passive Income with Stablecoins
One popular way to earn passive income with stablecoins is through Binance Earn, a suite of investment products offered by Binance, one of the world's largest cryptocurrency exchanges. Investors can buy stablecoins on the "Buy Crypto" page and earn compound interest on their holdings. Additionally, investors can use the recurring buy feature to make regular purchases of stablecoins, steadily building their portfolio over time.
Conclusion
Stablecoins offer a safer and more stable investment option in the cryptocurrency market. By maintaining a stable value relative to a fiat currency, stablecoins reduce the risk of significant price fluctuations, making them an attractive option for risk-averse investors. With the ability to earn passive income through various investment products, stablecoins provide a compelling opportunity for investors to diversify their portfolios and generate returns in the cryptocurrency market.
