BigONE Strategy: Things You Need to Know Before Buying Stablecoins
Stablecoins are another aspect of the cryptocurrency business that has grown rapidly in recent years, from $28 billion at the start of 2021 to $109 billion by July. These cryptocurrencies’ prices are ‘pegged’ to another asset, such as the US dollar or gold value. This basically prevents you from incurring any losses because of price volatility typical with other cryptocurrencies. When used as a payment method, a popular cryptocurrency such as Bitcoin soon encounters problems. Any recipient of bitcoin wants to know the value of the Bitcoin they have received. Take the example of running a business and accepting Bitcoin as a payment method. You also accept US dollars to pay staff salaries and suppliers. If Bitcoin suddenly goes down in value by 20%, this causes immediate problems for your business.
The use of stablecoins can help in the resolution of these issues. While they retain the benefits of typical cryptocurrencies, such as transaction speed, affordability, and security, they have the added benefit of reduced volatility. Furthermore, stablecoins are easy to buy and simple to trade, making them a perfect basic transaction currency.
If you are considering buying a stablecoin, here are some things we think you should know:
Stablecoins Are Less Volatile
As the name suggests, stablecoins are ‘stable’. In the case where the prices of other cryptocurrencies may rise or fall, stablecoins will not. The downside of stablecoins is that you may miss the potential for long-term high returns, which is what attracts many investors to invest in cryptocurrencies as a whole. For example, Bitcoin has risen by nearly 5,000% in the past five years, and the stable currency Tether (USDT) is still valued at $1 as it pegged 1:1 with the US dollar.
Stablecoins Can Be Backed by Different Types of Collateral
Every stablecoin needs collateral support, which can be divided into three main categories:
Fiat (traditional) currencies: These cryptocurrencies are linked to the price of traditional currencies such as the U.S. dollar. At present, the mainstream stablecoins in the market include Tether (USDT), Gemini Dollar (GUSD), and USD Coin (USDC).
Other cryptocurrencies: These are more complex but attractive to investors who don’t want to rely on any form of traditional currencies. They use smart contracts to balance volatility. The current mainstream examples include Dai (DAI) and Havven (HAV).
Commodities: The value of these cryptocurrencies is linked to the price of commodities such as gold, oil, and even real estate. The current mainstream examples include Digix Gold (DGX) and Paxos Gold (PAXG).
Looking for Transparent and Audited Stablecoins
If the issuer produces $20 million in stablecoins, it will need to be backed up with $20 million in traditional cash. But as an investor, how can you be certain that it really has the backing? Some stablecoins, such as the Gemini Dollar, are regularly audited by professional accounting companies to certify their cash reserves.
On the other hand, tether, the world’s most popular stablecoin, has been chastised for not fully backing its currency. According to a study conducted by the New York Attorney General (NYAG), just 74% of Tether had reserve support at one point. The risk is that if everyone were to sell all their Tether, some individuals would be left with nothing. Tether has now been forced to reveal information regularly about its assets as part of a settlement deal with the NYAG to strengthen its support.
Interest Can Be Earned Through Stablecoins
An attractive aspect of stablecoins is that you can receive much higher interest rates than savings accounts. Several top cryptocurrency exchanges pay interest rates ranging from 5% to 10%, or even higher for stablecoin deposits. The way the exchange pays such a high-interest rate is to lend your stablecoin through decentralized finance (DeFi). The borrower provides collateral for the loan, which provides some protection to the lender.
Stablecoins are undoubtedly a less risky way to enter the cryptocurrency market, but they still carry some risks. The practice of many governments worldwide in launching their own digital currencies, also known as central bank digital currencies (CBDCs), is worth noting. If in the future such digital currencies become mainstream, it could impact the existing stablecoin currency market.
About BigONE
BigONE is a global cryptocurrency exchange that provides a platform for trading various cryptocurrencies. It was founded in 2017 and registered in the Netherlands. The group operates in Russia, Brazil, Vietnam, Seychelles, Singapore, Japan, and Indonesia, providing marketing, investment, and blockchain technology research & development.
