Crypto Investing
29 Dec 2021

Why might you want to Consider Investing in Stablecoins?

Ananda Banerjee

The crypto space isn’t all that volatile, right! Yes and No

While the typical crypto market, with all that private capital, still comes with volatility concerns owing to a relatively smaller market cap, some crypto players follow a different suite altogether. 

Fact Check: As much as we should revel in the celebrations of the crypto market reaching a market cap of $3 trillion, it is still far behind a reserve asset like Gold, which has a market cap of over $11 Trillion.

Key Takeaways

  • Stablecoins are less volatile cryptocurrencies, mostly pegged to a reserve asset
  • The investment profile of a stablecoin depends on the type of asset it is backed by
  • In standard crypto exchanges, stablecoins act as utility tokens to help with trading and arbitrage
  • Stablecoins are excellent crypto picks for making quick day-to-day payments as the prices are mostly fixed
  • There are fiat, commodity, crypto, and algorithmically backed stablecoins around
  • Stablecoin value hinges on the trust factor
  • Decentralized stablecoins like DAI are easier to audit 
  • Some of the more popular stablecoins include Tetherm, TUSD, and DAI
  • You can lend, stake, and yield farm stablecoins to earn from them

And did you know that, unlike crypto, the market dealing in Gold is a lot less volatile? Just imagine throwing a pebble in a pond to watch the ripples, but when you throw the same in the ocean, it hardly even winks. 

Nevertheless, the crypto space is as lucrative as it gets despite all the volatility around. And it’s mostly due to its decentralized and transparent nature. But it’s also true that some of you might not have the stomach for investing in such a volatile and sentiment-driven market. And trust me, it’s completely ok to be skeptical.

But then, what if there was a way to deal, trade, and invest in cryptos in order to explore the diverse benefits of Blockchain technology minus the value volatility. Well, there are many ways to do that, provided you know a fair bit about Stablecoins.

What are Stablecoins?

Before you contemplate investing, it is important to understand the concept behind Stablecoins. 

Let’s start with a standard definition, and we can always build it up from there. 

A stablecoin is a cryptocurrency that is pegged to or backed by a reserve asset. The reserve asset can be any fiat currency, commodity, or even other cryptocurrencies. Also, the ROI-specific potential of a stablecoin is often related to the type of reserve asset backing it.

*ROI- Return on Investment

But all this is just plain English. What’sWhat’s the ingrained principle driving the Stablecoins? 

Well, for starters, a Stablecoin is simply a tokenized variant of the reserve asset, such as the US Dollar, that can be subtly introduced to a blockchain ecosystem as a means to facilitate seamless cross-border transactions, improved arbitraging, and value exchange.

Fact Check: Arbitrage in the crypto realm is an act of making quick buy and sell transactions to gain from the price differences across markets. 

In some cases, Stablecoins are even termed utility tokens as they allow you to place quick purchase and sell orders in decentralized exchanges where fiat currencies aren’t allowed. They are even useful in centralized exchanges as fiats take a lot of time to get processed, but their tokenized variants are standard blockchain entities that move rather quickly.

Important: Centralized exchanges are regulated with a single failure point and support for Fiat-to-Crypto trading. DEXs or Decentralized exchanges do not support fiat directly and offer enhanced security

Why invest in Stablecoins- Reasons

What is the Point of Creating a Stablecoin?

Investing in stablecoins needs perspective. Therefore, it is important to understand the point of creating one in the first place. 

Imagine buying Bitcoin and planning to use it for daily transactions. But then, you wouldn’t want to use something like BTC to pay for basic daily utilities as the price might surge 20% one day, or it might dip by 10% within minutes. 

Existing crypto players like BTC make great value reserves. Still, for handling regular transactions, it is advisable to get something more stable, which then brings us to the discussion concerning Stablecoins.

Like their name, Stablecoins are relatively stable when price action is concerned as their value is backed by something more concrete and regulated. For instance, Tether or USDT is a stablecoin pegged to the US dollar.

What are Stablecoin Pegs? 

Stablecoins are pegged to reserve assets, right! But how the peg is determined is as important as the coin itself. 

Fiat-Collateralized

These stablecoins are pegged to the sovereign legal tenders of concerned countries. Tether and TUSD (True USD) are some of the prime examples of fiat-collateralized stablecoins.

If you want clarity about ‘What is Tether?‘ and ‘How it works, learn more with us. 

But then, it isn’t the central authority that creates the utility tokens or Stablecoins. Instead, a company issues these tokens by putting an equivalent amount of the fiat in its reserves. 

Put simply, the value of the stablecoin is based on the trust that the company behind has the required amount handy. 

In the case of stablecoins, Belief equals value. 

Commodity-Backed

Not every stablecoin is pegged to a fiat currency. The likes of Kitco Gold are backed by gold reserves held by the company, and the token itself follows the ERC-20, Ethereum-backed blockchain ecosystem.

Crypto-Backed

Better termed as on-chain stablecoins, the value of these entities are backed by another Crypto asset via Smart Contracts. As the crypto space is volatile, crypto-collateralized tokens are often over-collateralized to combat price fluctuations.

Fact Check: DAI from MakerDAO is one example of crypto-backed stablecoins. However, despite being primarily pegged to the US Dollar, its crypto-backed nature needs over-collateralization. This means you must deposit $1000 in the form of ETH to purchase a $500 value in the form of DAI stablecoins. 

Algorithmic

These are primarily non-backed stablecoins where prices, token numbers, and other factors are manipulated using special algorithms, software, and code in an effort to manage supply and demand better. This approach lets the company keep the reserve peg intact in case of price fluctuations. 

Now that you have read quite a lot about Stablecoins in theory let’s get back to investment-specific aspects of the same. 

Is it Wise to Invest in Stablecoins?

The short answer – yes, you can consider investing in stablecoins. However, if you want a more detailed perspective, you must understand the earning potential of these utility tokens.

Crypto Lending

The relatively stable nature of Stablecoins makes them good interest-earning picks in the form of crypto lending. As this principle is also synonymous with decentralized finance, it wouldn’t be wrong to consider Stablecoins as the DeFi precursors for now, especially if the participants seek improved liquidity without having to account for value volatility.

Fact Check: Standard DeFi activities concerning stablecoins can help you earn anything between 4 to 20 percent in terms of Annual Percentage Yield.

If you are into specifics, Stablecoins can be used to lend crypto across platforms like Aave. This is synonymous with keeping money with banks in savings accounts and earning interest along the way. 

Crypto Staking

This is a fun way to earn using Stablecoins and is even quite profitable. Staking in the crypto realm relates to the Proof-of-Stake consensus method, where the coins are locked to verify specific transactions. Pledged or staked coins generate rewards once the transactions are verified by running specific algorithms on nodes. 

Store-of-Value

Stablecoins, owing to their minimally volatile nature, can act as value stores for those who prefer HODLing coins. Once stored for a long time, you can even deploy the coins sparingly for Yield farming.

Fact Check: In simple terms, Yield farming is like locking assets or value to a liquidity pool for helping DEXs or Decentralized Exchanges manage fund movements with ease. Yield farming, therefore, is rewarded with an exchange fee percentage. It is more like using your coins to provide liquidity.

However, before you invest in Stablecoins to earn via one of the mentioned interest and reward generating methods, you must keep the following factors in mind. 

  • Stablecoins hold value based on people’s trust in the company holding the collateralized reserve asset.
  • If the company goes bankrupt, the stablecoins have chances of losing value
  • Declaration of solvency is important to keep trust in the coin and keep the value strong
  • Stablecoins aren’t meant for trading gains unless there is a sense of unrest in the fiat or commodity market

Wrap-Up

Long story short, Stablecoins can be reliable assets to invest in, and if you are still on the fence about getting some, you can start right away by reading through this entire explainer with rapt attention. As much as I personally like the concept behind Stablecoins, they aren’t your typical money minters, something that you typically associate with Bitcoin, Etjhereum, and other typical crypto players.

However, if you fancy some passive income and the blockchain tech meant to speed up P2P payments and transactions, a stablecoin can be the least volatile head start. It’s not a wealth creator but still gives you enough to help you know the crypto space better. 

FAQS on Investing in Stablecoin

Q1. Are stablecoins a good investment?

A1. Yes, stablecoins make good investment instruments, provided you have a low-risk appetite and affection towards blockchain technology. 

Q2. Can you make money on stablecoins?

A2. Yes, you can make money by lending or staking out stablecoins, which companies use to offer secure third-party loans. You earn at the end of the term when you get the stablecoins and the accrued interest, which might be more than 10 percent in some cases.

Q3. What are the best stablecoins to invest in?

A3. If you are really serious about investing in stablecoins, you can head over to CoinSwitch Kuber and take your pick. Once you have done your research, every stablecoin listed on the exchange is good enough to consider. 

Q4. How safe are stablecoins?

A4. Pegged cryptos like stablecoins are relatively safe as they showcase the same volatility as the asset itself. And while the in-market movements are mostly safe, central stablecoin repositories can still be prone to robbery or even loss of confidence, provided the repository doesn’t actually hold the requisite number of assets in real-time.

Intrigued already! Do check out stablecoins listed on the exchange and download the CoinSwitch app right away to get down to investing.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

writer

Ananda Banerjee

Content Writer

Table of content