There are all kinds of different coins out there in the cryptocurrency world. Between coins, utility tokens, equity tokens, and everything in between, it’s difficult to keep track of the differences. Today, we’re going to take a look at one of the remedies to volatility: stablecoins. These coins are used to help investors in times of market turmoil. But what are they? How do they work? And are there different kinds? Let’s answer all those questions below.
What are ‘Stablecoins?’
As the name implies, stablecoins are coins that remain, well…stable. The concept is simple. Creators want to give investors an option for their money when the markets are increasingly volatile. The way to do that is to offer a coin that counters that volatility and doesn’t move in massive price swings.
Unlike the majority of cryptocurrencies out there, stablecoins don’t fluctuate much in the way of value. Bitcoin, litecoin, ether, etc. all experience drastic price changes in the markets. All we need to do is take a quick look at the change in price for bitcoin (BTC) over 2017.
As we can see, the price of BTC changes a lot over the span of one year. Now that’s fine if you’re a day trader or someone looking to invest for the long run with confidence, but what about everyone else? Sometimes investors need a place to park their funds to get away from the volatile storm.
For comparison, let’s look at the change in price of USDT (one of many stablecoins) over the span of that same year (2017).
Seen above, the price of Tether (USDT) did change somewhat over the span of the year. However, the value stayed mainly consistent and always returned back to its average price.
How do Stablecoins Work?
Okay, so they stay pretty stable in price, we’ve got that part down. But how exactly do the work?
The reason these coins are able to remain stable is because of what they’re tied to. Stablecoins function by having their value tied to another underlying asset. So what does that mean?
The easiest way to think about it is as the coins and tokens being representative of another asset. If we take USDT as an example (and they have had their own problems, but they’re just one of the most well-known), we see that exactly.
In theory, each USDT token is supposed to be completely backed by the US dollar with a 1:1 ratio. That means that if you hold 1,000 USDT, you should be able to turn in those 1,000 USDT tokens for $1,000 USD (minus a small fee). Now this may not always be the case depending on the company. Certainly, some companies are more reputable than others. However, the key is to always do one’s own due diligence before moving a significant amount of funds regardless.
Other examples of stablecoins include those backed by gold, silver, or any other traditional asset class like fiat currency. USDT happens to be backed by the US dollar, but there are others just like it. The concept is pretty simple and we can think of stablecoins as the cryptocurrency equivalent to the gold standard that the US dollar used to be on.
Here are some other stablecoins to check out!