Stablecoin

Stablecoins are cryptocurrencies that have been designed to keep a stable value.

These differ from other cryptocurrencies like Bitcoin and Ethereum, which are freely traded assets.

Stablecoins have several inherent advantages in their structure. This includes a greater emphasis on stability over volatility, which is a huge draw for risk-averse investors looking for exposure to cryptocurrencies.

Indeed, many individuals can be turned off from large swings and uncertainty presented by cryptos relative to other traditional assets.

As such, Stablecoins control for this volatility by being pegged to another cryptocurrency, fiat money, or to exchange-traded commodities such as gold, silver, or others.

Stablecoins Explained

Stablecoins are redeemable in currency, commodities, or fiat money and are also said to be backed, whereas those tied to an algorithm are not considered to be so.

There are several advantages of asset backed crypto. For example, these coins are stabilized by assets that fluctuate outside of the crypto space, that is.

This can help mitigate the financial risk associated with these assets.

Bitcoin and altcoins are highly correlated, such that cryptocurrency holders cannot escape periodic price falls. Stablecoins account for this vulnerability and control for it, allowing for the diversification of risk in a portfolio.

Stablecoins also possess a mechanism for redeeming the asset backing them.

This grants an additional level of confidence associated with the coin and are unlikely to drop below the value of the underlying physical asset, due to the effects such as arbitrage.

For example, fiat-pegged coins are coins that are tied to a specified amount of fiat currency, usually on a one-to-one ratio (i.e. 1 StablecoinX = $1).

The companies that issue these currencies must have fiat reserves in the equivalent amount of the Stablecoins they have issued.

Crypto-pegged Stablecoins constitute coins that are tied to a specified amount of another cryptocurrency, such as Bitcoin or Ethereum.

Algorithmic Stablecoins use supply-and-demand to automatically maintain a stable value.