Stable Coins

So what is a stable coin?

If you are new to the crypto space, then one of the things you have to learn is about stable coins. So what is a stable coin? We have to backtrack a bit to get a clearer picture. The world revolves around fiat currency. If the word "fiat" does not ring a bell, think US Dollar, Japanese Yen, Swiss Franc, and all the paper money printed by central banks. As we all know we buy stuff with it. The stable coin is "somewhat" similar. Of course, you can not walk into any store and say I'll pay with stable coin (at least not yet, but hopefully soon). Stable coins are primarily used to transact payments in exchanges. So instead of paying US dollars for BTC, you would pay with a stable coin like USDT, USD, or BUSD.... I'll explain these kinds later.

What gives it value?

MOST stable coins are pegged or backed by something of value in the physical world. It could be a fiat currency (like US Dollar), another cryptocurrency, commodity, or financial instrument. So why do they have to be backed? Because investors want to be assured that they can convert their stable coins to cash at any given time. In simple terms: Promises are good, but people need cash.

But not all are backed by something physical. There is such as thing as an Algorithmic stable coin. Instead of reserved backing, this type relies on computer programming to preserve its value. If it sounds like somebody is selling air, then you are not alone in that assumption. A lot of people lost money in the recent Terra (Luna) - TerraUSD (UST) collapse. The fiasco highlights the pitfalls of relying on an algorithm.

So how many stable coins are there?

You'd be surprised by the number of stable coins being offered in the market. Coingekco list 85 coins at the time of writing. The biggest ones are Tether (USDT), USD coin, Binance USD (BUSD), and Dai. Which one to use is a matter of preference. It is a good idea to research how each coin is backed. Look for reports on how those reserved assets are audited.

So why buy stable instead of just BTC or ETH?

Cryptocurrencies in general are highly volatile assets. It is not uncommon to have a 10% movement a day. The word "stable" is the key to everything. A stable coin will allow any investor to park their money on something that is supposed to maintain its value on a 1:1 basis to a given currency. So holding one USDT should also mean you can encash it to $1 US. In theory, anybody can put his money on a stable coin while waiting for a good trading opportunity. But the 1:1 peg is not absolute. It will sometimes just drop below the peg, but a good stable coin should be able to rebound quickly.

Recap.

Stable coins are simply cryptocurrencies pegged 1:1 to a currency like the US dollar. For example, 1 USDT should be equal to US$1. Most are backed by assets to maintain that peg.

*For educational purposes only. Not financial advice