Stablecoins are digital assets tied to external assets, like the US dollar or gold, and thus have lower volatility than cryptocurrency.
So while the masses have a basic understanding of Bitcoin and other types of altcoins, many are still afraid to invest in cryptocurrency because of the high volatility associated with it.
Of course, anyone who acknowledges that there is high volatility in cryptocurrency isn't wrong. On January 1, 2021, an individual who held one Bitcoin owned an equivalent of $28,388. Fast forward just three months and Bitcoin hit a high of $64,899 in April 2021. However, around July 20, 2021, Bitcoin once again fell to $29,789. Just a few months later, Bitcoin hit another all-time high in November 2021, after reaching $69,000.
So while cryptocurrency is volatile, there is a way for investors to participate in the crypto space while also mitigating their risks. The solution for investors who are not looking to take on high volatility in their crypto investments is stablecoins. So, what is a stablecoin and how are they used in the investment world? Read on to learn more about stablecoins, what types there are, where you can buy them, and how they help to reduce volatility in your crypto investments.
An Introduction to Stablecoins
Stablecoins live within the crypto space. Essentially, their value is pegged to a currency like the U.S. dollar or to a commodity's price, such as gold. As the value of stablecoins is pegged by concrete external references, they maintain price stability via collateralization. To understand a bit more about stablecoins, check out the three main types of stablecoins below.
Fiat-Backed Stablecoins
The first type of stablecoin is the fiat-backed or fiat-collateralized stablecoin. Fiat-backed stablecoins are coins that maintain a “fiat” currency reserve such as the U.S. dollar. Some popular fiat-backed stablecoins include USD Coin (USDC), Tether (USDT) and TrueUSD (TUSD).
Crypto-Backed Stablecoins
The second type of stablecoin is the crypto-backed or crypto-collateralized stablecoin. Crypto-backed stablecoins are coins that are backed by other cryptocurrencies. To help stabilize crypto-backed stablecoins, a larger number of cryptocurrency tokens are maintained as a reserve to issue a lower number of stablecoins. A popular crypto-backed stablecoin is DAI (DAI) which is backed by Ethereum and pegged against the U.S. dollar. DAI strives to keep its value as close to one U.S. dollar as possible through automated smart contracts on the Ethereum blockchain.
Commodity-Backed Stablecoins
The third type of stablecoin is the commodity-backed or commodity-collateralized stablecoin. Commodity-backed stablecoins are coins that are backed by different types of interchangeable assets like the precious metals of gold and silver. A popular commodity-backed stablecoin is Digix Gold (DGX). Digix Gold is an ERC-20 token developed on the Ethereum network and is backed by physical gold. The Tiberius Coin (TCX) is another popular commodity-backed stablecoin. The Tiberius Coin is backed by a combination of seven different precious metals.
Where can I buy stablecoins?
Stablecoins can be purchased by anyone through easily accessible cryptocurrency exchanges. Some services may not be available in all locations, so make sure to check whether the options you want are available where you live.
Some popular cryptocurrency exchanges include:
How To Make Money with Stablecoins
With stablecoins being less volatile, there is little to no chance of a stablecoin achieving massive growth seen among other cryptocurrencies. However, there are still ways for investors to make money with stablecoins. One of the popular ways to make money with stablecoins is through staking.
Staking is simply the process of actively committing your crypto assets to support a blockchain network that confirms transactions. Crypto staking is a process utilized by many investors to generate passive income through their crypto holdings.
Two popular staking platforms are Celsius and Nexo.
Earning Money on Celsius With Stablecoins
Celsius is a centralized lending solution that is based on blockchain technology. People can borrow from Celsius or leave cryptocurrencies on deposit with Celsius to be lent out. In exchange, they’ll earn interest. Investors who lend their cryptocurrencies out through Celsius can earn 2-6.5% APY on their Stablecoin, depending on the coin and length of the term.
Earning Money on Nexo With Stablecoins
On the Nexo platform, investors can earn up to 12% APY on their stablecoin holdings. The ability to earn more APY rests on how many Nexo tokens an individual keeps within their Nexo wallet. Holding a higher number of Nexo tokens results in the ability to earn higher APY on stablecoin holdings. On the Nexo platform, staking rewards are paid out daily.
Final Thoughts
We hope this cursory overview has been able to help you learn a bit more about stablecoins and cryptocurrency, as well as maybe answer some of your questions about stablecoins. However, we also understand that you probably still have a lot of questions when it comes to cryptocurrency and investing, as there is so much to learn and consider. Luckily, you don't have to take on all the challenges that come with investing alone.
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*Disclaimer: EquityBrix is not an investment adviser. This information is for educational purposes only and does not constitute investment or tax advice. It’s important to be informed and to make your own investment decisions or do so in consultation with a professional financial advisor. Under no circumstances should this material be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of a written online prospectus relating to the particular investment.
