Are Stablecoins Really a Thing in This Crypto-driven Investor Community?

While researching cryptocurrency, you may have come across the term “stablecoin”, but what it is and what it is used for is still unclear. Well, in the shortest ever definition, a stablecoin is an alternative for those wanting to avoid volatile cryptocurrencies.

With the price of virtual currencies fluctuating dramatically lately, market participants are looking to safeguard their assets or invest in another kind of asset, a much less volatile one.

Fortunately, they have a choice; stablecoins are designed to match in value a low-risk investment, which could be a currency such as the US dollar or euro, a financial instrument, or a commodity like gold. For instance, a stablecoin pegged to the euro value should always be valued at approximately $1.

However, questions regarding this type of asset have arisen since the meltdown of TerraUSD in May 2022, which demonstrated that not all stablecoins are made equal, so not every such coin can guarantee price stability. So, considering one of the catches of virtual currencies, volatility, people embarking on a crypto investment journey are somewhat skeptical about whether or not stablecoins are profitable.

Others, on the other hand, prefer to invest in what they know better: Bitcoin. Hence, many investors buy Bitcoin with a credit card or another payment form and hold it long-term, hoping it’ll bring them substantial ROI. Indeed, as the largest cryptocurrency by market cap, Bitcoin makes for a good investment option, but people investing in crypto assets are recommended to diversify their portfolio.

Are stablecoins a viable addition to your portfolio? Let’s find out!


Types of stablecoins

Types of stablecoins

Stablecoins are usually backed by a commodity like gold or a currency like USD, but it’s not just that. These are just the most common types of investments stablecoins are pegged to, but the complete categorization includes:

  • Fiat-collateralized stablecoins
  • Commodity-backed stablecoins
  • Crypto-backed stablecoins
  • Algorithmic stablecoins

How are stablecoins used

Stablecoins are sort of bridges between virtual currencies and fiat currencies, being often considered the most viable alternative to highly volatile cryptocurrency.

Fans of digital assets are thrilled with the idea of storing the value of their savings in coins backed by a more stable commodity or currency. Moreover, these coins provide just the same advantages as cryptocurrency: low fees, instant transfers, and top-notch security, but without forcing investors to watch for volatility constantly. Hence, there would be no wild movements in the value of their portfolios.

International bank transfers are a prominent example of one stablecoin use case. So, instead of waiting days for a transfer to be completed and paying a range of associated fees, stablecoin users would immediately have their international bank transfer performed and – the best part – with low to zero charges. In other words, stablecoins can be used daily to pay for everything from electricity bills to fares and groceries.


Stablecoins – a good investment?

To answer investors’ most prominent question, yes, stablecoins do make money. But this is far more complex than some might think. First, it depends on the type of stablecoin chosen.

Centralized issuers, for example, generate revenue by investing their dollar reserves in higher-yielding property classes, treasury bills, or commercial paper. Second, the stablecoin investment option can make or break these people’s attempts to make money. Those interested in stablecoins can choose from crypto lending, crypto staking, and a store-of-value method that also comes with the possibility of yield farming.

Variants are many, but one thing is for sure: the stablecoin investment method should be selected based on one’s specific needs and, after all, skillset.


They’re a store of value

Stablecoins are becoming the favored type of asset for many investors looking for stability. They maintain their value and, in some cases, even increase in price when other digital currencies are falling, and the market is crushing.

Given this characteristic, stablecoins are an excellent store of value, particularly in these testing times. Plus, it’s easy to predict a stablecoin’s price, even in the long run, as if the currency it’s pegged to is doing well; the same will be with this particular stablecoin.


They can generate passive income

They can generate passive income

Many investors take the stablecoin route to maximize their profits, as these assets promise ROI without much hassle or work. Besides, several crypto exchanges provide foreseeable interest rates of between 3 percent to 20 percent each year, which is great for long-term investors looking to earn more than what they put in.

However, before buying such coins, enthusiasts are advised to check the asset value they’re backed by. Usually, it’s not recommended to invest in a stablecoin pegged to a type of commodity whose value has suffered multiple changes recently.

Just because they’re more stable than cryptocurrencies, it doesn’t mean they don’t require thorough research, so investors are advised to consider the stability of the commodity in question carefully before purchasing.


These stablecoins may serve a useful purpose in your portfolio

There are approximately 200 stablecoins on the market today, but just like in the case of cryptocurrencies, some managed to have more influence than others. These are the most heavily traded stablecoins in the crypto space and are believed to generate a substantial return on investment.

This, of course, isn’t a decisive factor regarding your investment choice, but it should definitely be considered. Having some established, high-quality coins in your portfolio may make more sense than immersing yourself in some whose name is already forgotten.

The largest stablecoins right now by market cap are Tether (USDT), USD Coin (USDC), Binance USD (BUSD), True USD (TUSD), Origin Dollar (OUSD), and Paxos Standard (PAX). As you can see, most are pegged to the US dollar, proof that USD is making waves in the market.


Limitations of stablecoins

Almost every commodity has limitations, so it just wouldn’t be wise to expect things to differ with stablecoins. There’s risk in any investment, and the risk that comes with stablecoins refers to the companies holding the collateralized reserve asset.

If this goes bankrupt, these coins are likely to become invaluable.


Wrap-up

Weigh your choices carefully and never invest in something you know nothing about. Stablecoins may be safer than crypto, but they require the same research.

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