Explained: What Are Stablecoins And How Do They Work

Stablecoins may be better used as a form of digital cash rather than a speculative investment.
Stablecoins may be better used as a form of digital cash rather than a speculative investment.

The cryptocurrency market is known for its volatility. This means that the prices of coins can rise and plummet abruptly, which makes it difficult for investors to zero down on a particular coin. However, stablecoin solves this issue. Stablecoins are digital currencies that are backed by assets such as fiat currency, other cryptocurrencies or gold. The stable assets make these coins less susceptible to fluctuations and keep their prices stable. Certain stablecoins also use a computer algorithm to keep their value comparatively stable.

Here's how stablecoins work:

1. The advantage of stablecoins is that they are built to withstand volatility in a way that other cryptocurrencies aren't. Additionally, they can offer mobility and accessibility. It is a more stable cryptocurrency that is decentralized. This implies that is not tied to a centralized system or agency. This, inturn, grants it autonomy.

2. There are several other reasons for stablecoins being popular among investors. It allows for faster transfer of money and provides privacy of financial data. Along with this, stablecoins also allows users to circumvent financial service fees.

3. In several ways, stablecoins may not be like other crypto investments. They are designed to stay put in terms of value. This means that while they will not be a fall in value, it will not rise either.  This can be understood by comparing the USD coin to the Bitcoin. Since its inception, the USD coin has hardly fluctuated from its $1 value. Bitcoin, on the other hand, was valued at $4,000 in 2019, and at $60,000 by May 2021.

4. It would be wise to consider stablecoins as a form of digital cash. However, in spite of its stable nature, it is still a cryptocurrency. Therefore, it is still a newer entity that may have some undiscovered risks.

5. Cryptocurrency can be a dangerous option if you want to invest all your savings. Approach stablecoins with an open mind and explore the area.  You can also use stablecoins as your first step towards investing in some form of cryptocurrency.