You may have heard of stablecoins before if you know anything about cryptocurrency. They are all the rage in some circles and are gaining in importance.
If you don’t already know them, get ready for a quick overview. We’ll cover what you can do with them and why they’re a better option than some other popular forms of crypto.
What exactly are stablecoins?
A stablecoin is a type of cryptocurrency. The designers made it so that it would keep around the same price. Stablecoins can offer more stability than other cryptocurrencies, so you don’t have to worry about the wild market swings that can sometimes accompany other forms like Bitcoin, Ethereum, etc.
When you buy stablecoin, you typically get a form of crypto that the designer pegs to a commodity or currency. An algorithm also regulates its supply. This also means more market stability for buying, trading and investing.
What does buying stablecoins mean for a crypto trader?
Crypto trading appeals to some individuals looking to get rich quick. Some find success this way, while others can quickly lose their shirt in a bear market. In this respect, crypto trading can be viewed like the stock exchange.
However, some crypto traders are unsure about the stability of stablecoin, even with the safeguards built in. They want to know if a stablecoin investment can crash similar to investing in any other form of crypto.
The most important thing to know about stablecoins is that they can still crash, even with the currency or commodity connection. The real question is whether there are enough stablecoins directly linked to its collateral assets.
In other words, say you buy some USDTs. They peg to the US dollar, so one USDT equals one dollar. Reserves must match the number of stablecoins you can buy.
This allows you to avoid price fluctuations and maintain stability. If you have a crypto asset portfolio that is less than 100% stablecoins, you could be in for a crash.
Companies that hoard many of their secured reserves risk their stablecoin crashing. However, unless you are part of this company, you may not know how much of their particular stablecoin they hold in reserve. This can work against you as an investor.
How companies store reserves
Let’s say you have a company with its own unique stablecoin. How it stores its reserves can spell success or disaster for a trader if they have that particular stablecoin as a large part of their portfolio.
If a company owns a large amount of its stablecoin, it could promise to store that crypto in fiat currencies. A fiat currency is something like the US dollar. It is a form of currency that a country adopts as its own.
However, the company decides to take this large reserve and put its stablecoin in a different crypto form instead. You are essentially speculating that this other coin will do well.
If that happens, they risk the stability of their own stablecoin. You may jeopardize an investor’s market strategy without telling them. It’s unethical, but some companies do it.
If an investor feels that a company is playing fast and loose with their own stablecoin stores, they might decide to pull all of their money out of this particular one. That can affect the liquidity of the coin.
This can lead to a crash. If you’re putting a lot of money into a stablecoin, you should try to choose one that’s from a company you trust. That’s probably a company that has secured investments.
Can governments regulate stablecoins?
This is a tricky question. Much of the crypto market remains unregulated, and that’s what some people like about it. Although the Biden administration signed legislation related to crypto, significant challenges arise as the government attempts to enforce it. Crypto remains the Wild West for now.
This applies to both stablecoins and other forms of crypto. Many investors want to invest their money in stablecoins as they believe their value can increase and they are less likely to crash than other crypto variants. We just described one way a stablecoin can still take a nosedive.
Some governments believe companies are using stablecoins for illegal activities, or fear the possibility. When you use a stablecoin and pay for something with it, it’s much harder for a government to keep track of and tax your purchases. You don’t have to involve financial institutions in such a transaction, so you might as well buy something illegal or unethical.
The US wants to regulate stablecoins just like other crypto forms. What’s not entirely clear is the timeline of when you, as an investor, can expect it.
What about hoes?
If you’re into stablecoins as an investment, you might want to know about hacking. You can put your stablecoins in a digital wallet and keep them there like other forms of crypto. This makes your transactions easier.
However, if you put your crypto in a wallet, hacking remains possible. Most crypto storage sites and platforms are unlikely to implement security measures. Still, hackers are always working to find ways to steal online funds and valuables, and that goes for crypto as much as anything else.
Any time you use a crypto exchange, you should know that vulnerabilities can exist. Some platforms boast of having the latest security technology at their disposal, but security breaches can still happen.
Since your wallet or any crypto platform you use may have vulnerabilities, you may want to store your stablecoins or other crypto investments on an insured platform. If you use one like Nexo, it has safeguards in place that protect your crypto assets just like the FDIC protects banks. The platform compensates you if someone steals your assets.
In short, stablecoins offer more stability than most other cryptoforms, but they remain unregulated and it’s not impossible for them to crash. It is also possible for hackers to steal them, so try to use an insured platform for storage.
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