Traditional crypto assets like Bitcoin & Ethereum have seen price fluctuations in a short period of time. Recalling the historical price of Bitcoin in Sept 2021, it rose by nearly 70% from ₹30 Lakhs to ₹50 Lakhs. But then it sharply dropped by 50% in Jan 2022, returning to around ₹26 Lakhs.
To minimize the adverse effects of such volatility during bear markets, investors have started diversifying in stablecoins like USDT (Tether) and USDC (USD Coin) in their crypto portfolio.
Did you know you can get secured returns on stablecoins?
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So what are Stablecoins? How do they maintain their price stability?
Stablecoins are a type of digital asset whose value is tied to the value of a currency, a commodity, or any other financial instrument. So for every stablecoin that is in circulation, a reserve of these real-world assets are maintained as collateral.
This way they offer the benefit of being non-volatile in nature. They are also useful for quick payments without the need of an intermediary. Let us understand this with an example: Suppose you want to send Rs. 100 on a bank holiday. You may use blockchain technology for instant money transfers. But due to price fluctuations in BTC or ETH, one may receive Rs. 95 or Rs. 105. Either case is not ideal. So to deal with the mispricing caused due to volatility, one can instantly send stablecoins whose value remains constant with the added transparency of all of the data being recorded in a public blockchain ledger.
What are the Use-Cases of Stablecoins?
Trading volumes for stablecoins are increasing, and there’s a lot of real-world use cases for token holders to get excited about.
- Safe Haven Asset: Stablecoins remain stable during bear markets which make them ideal for portfolio stability.
- Trading: Due to their stable nature, more trading pairs are available on stablecoins, hence more trading opportunities.
- Lending and Borrowing: Stablecoins generally have higher yield earning opportunities.
- Remittance and Cross-border transfers: Instant settlement on blockchain due to low volatility in price.
What are the Types of Stablecoins?
|Fiat Collateralised||Cash or cash-equivalent reserves||Minimal||Tether (USDT)
USD Coin (USDC)
|Commodity Collateralised||Physical assets like gold and silver||Minimal to Medium||Tether Gold (XAUT)
Paxos Gold (PAXG)
|Crypto Collateralised||Crypto asset locked as collateral on a smart contract**.||High||DAI
|Algorithmic||Uses smart contracts to manage token’s supply||High||Tron USDD
*Backed Asset: Asset with which the stablecoin’s value is tied to.
**Smart Contract: Code stored on a blockchain that is executed when certain conditions are met.
Investors should be aware that stability of stablecoin depends on the quality of the collateral, liquidity and counterparty risk.
Summing It Up!
Stablecoins can be a great way for investors to diversify their portfolio & protect them in case of unexpected market cycles. Explore stablecoins such as USDT, USDC etc. on CoinDCX app & build a stronger & diverse portfolio today!