The cryptocurrency and blockchain market is notoriously volatile. While this is a huge selling point for many users, it’s also a significant obstacle to widespread adoption.
The ability to store value in digital tokens has clear advantages over traditional currencies like USD, but many people have been reluctant to adopt cryptocurrencies due to price volatility.
This has led developers to create digital assets that provide greater stability and usability for consumers by pegging them to fiat currencies like USD or EUR (or other assets like gold). These are called stable coins.
What are stable coins?
Stable coins are a type of cryptocurrency that aims to minimize the price volatility of the crypto and blockchain market. They do this by pegging their value to more stable assets, such as the US dollar or gold.
By doing so, stable coins provide a convenient way for users to store value and make payments in crypto markets with minimal price adjustment risk. Some of the most popular examples include Tether, MakerDAO and Gemini Dollar:
- Tether: Tether is the first stable coin to be backed by fiat currency (the US dollar). It’s also been around the longest, with an initial release in 2014.
- MakerDAO: MakerDAO has been described as a decentralized “bank of crypto-collateralized debt positions” and acts as a decentralized cryptocurrency exchange that allows users to create Dai, which can then be used for payments or exchanging into other cryptocurrencies like Bitcoin (BTC) and Ether (ETH).
- Gemini Dollar: The Gemini Dollar is another stable coin backed by USD and issued by Winklevoss brothers’ Cameron and Tyler Winklevoss who are famous for creating Facebook with Mark Zuckerberg.
Stable coins may also be pegged to other cryptocurrencies.
Aside from being backed by fiat currencies, stable coins may also be pegged to another cryptocurrency (e.g., DAI) or group of cryptocurrencies (e.g., Carbon) from other blockchain companies.
DAI uses Ethereum as collateral and Carbon is backed by a basket of currencies, e.g., ETH, BTC, BCH, LTC and XRP. The benefit of this approach is that it allows users to take advantage of the benefits associated with each asset without exposing themselves to any single risk factor such as volatility, inflation, or a crash from any one cryptocurrency in particular.
Stable coins may also be pegged to precious metals and a basket of assets.
Stable coins may also be backed by a basket of currencies and other assets such as precious metals (e.g., Digix Gold Tokens), real estate (e.g., Houses) or financial products (e.g., Havven).
In these cases, the value of the stable coin is stable because its price is pegged to another asset such as gold or pesos. For example, you can buy a $1 token that represents ownership in one ounce of gold. If the price of gold goes up from $1,000 per ounce to $1,500 per ounce you would be able to sell your token for more than $1 along with your original dollar deposit used at purchase time.
Wrapping It Up
As you can see, stable coins are a great way to invest in cryptocurrency without having to worry about the price volatility. Still, we understand how challenging it can be to get started with cryptocurrencies – whether you just want to learn all about it or you’re ready to invest your hard-earned money.
No matter your goal, Key Coin Assets can help. Our crypto asset managers specialize in helping people like you through crypto education, the latest blockchain news, and thoughtful digital asset management advice.
Take the first step to wealth beyond your dreams – send us a message to schedule a FREE consultation.