Gambling may be a lot of fun, but bitcoin’s 90% plunge in value in a few months? That level of risk is not for everyone. Stable coins are a good alternative: They have the same functionality as traditional cryptocurrencies, but they’re backed by real-world assets, making them less prone to huge drops in value when compared with their much more volatile cousins.
What are Stable Coins?
Stable coins are cryptocurrencies designed to provide more stability than other cryptos since they are backed by real-world assets like the United States dollar or gold. Other coins, such as bitcoin, aren’t tethered to a stable investment; their value is a mix of peer-to-peer technology and software-driven cryptography.
The ten most valuable trading stable coins by market capitalization, as tracked by CoinMarketCap, an analytics provider and cryptocurrency data.
|Reserve Rights||$441.2 million|
|Neutrino USD||$567 million|
|Pax Dollar||$945.8 million|
|Binance USD||$13.2 billion|
|USD Coin||$32.9 billion|
How Do They Work?
Various assets backed stable coins, including fiat money (your bank account), other cryptocurrencies, precious metals, and algorithmic calculations. However, the backing source of a cryptocurrency might impact its risk level. A fiat-backed stable coin, for example, may be stable since it is accompanying a centralized financial system with an authoritative figure (like a central bank) that can step in and regulate prices when valuations are out of control.
Stable coins that aren’t tied to a centralized financial system, such as a bitcoin-backed stable coin, may fluctuate dramatically and rapidly in part because there is no regulatory body overseeing the stable currency.
What is the Purpose of Using Stable Coins?
The interest in stable coins stems from their ability to maintain the stability that other cryptocurrencies cannot while providing accessibility and mobility. More importantly, a more resilient cryptocurrency decentralized and not controlled by a central system has several benefits: faster money transfers, access to financial services without having to fill out applications, financial data privacy, and cost savings. Stable coins are cryptocurrencies backed by real currency.
Stable coins may not be the most volatile crypto out there: They maintain a constant price, not increase in value. For example, the USD coin has remained almost unaltered in terms of value since its inception. On the other hand, Bitcoin hovered near $4,000 at the start of 2019 before soaring to over $60,000 in May 2021. Stable coins are a kind of digital cash rather than a speculative investment.
Even though stable coins are considered more secure than other cryptos, they still rely on cutting-edge technology. If you’re willing to risk your money in the hopes of making millions, stable coins may be a risky investment because they maintain stability.
Instead, consider putting aside some “fun money” — those dollars left over after you’ve amassed your savings and covered necessary expenditures — to utilize in addition to building a well-diversified portfolio. Individual equities can fill that void with lower risk than cryptocurrency if you add more risky assets to your portfolio.