You may have watched the prices of Bitcoin or Ethereum swinging up and down, and wondered how anyone can use cryptocurrency to buy something in everyday life. One day you can afford a car with your digital wallet and the next day you can barely afford a cup of coffee. This is where the stablecoins come in. They are the steady, solid members of the crypto family that maintain their value pegged to something stable. 

So What Are Stablecoins?

Stablecoins are cryptocurrencies pegged to a stable asset, usually the US dollar. Unlike Bitcoin, stablecoins should maintain a stable price. The most common stablecoins are Tether (USDT), USD Coin (USDC), and Binance USD (BUSD).

There are three major types of stablecoins. Fiat-collateralized stablecoins are backed by real dollars in bank accounts. Each issued stablecoin is allegedly backed by a dollar. Then there are crypto-collateralized stablecoins, which are backed by other cryptocurrencies, but require more collateral to cover the fluctuation of crypto. Lastly, there are algorithmic stablecoins that maintain their peg through smart contracts and market forces, but they have been less successful.

Stablecoins are predictable. That is why they are incredibly useful as a value storage mechanism, a payment mechanism, and a gateway between the traditional financial system and the crypto world.

Your Protection In The Stock Market Mayhem

Cryptocurrency markets have a reputation of wild swings. We've all heard stories of Bitcoin losing half its value in a matter of days, or entire portfolios getting wiped out during major crypto market crashes. In such volatile times, stablecoins provide a foundation on which traders and crypto investors can secure their funds while remaining in the crypto industry.

As the storm clouds begin to form in the crypto markets, smart investors will tend to trade their unstable cryptocurrencies into stablecoins. This is called “going to cash” in crypto lingo, and this strategy enables them to save their value in preparation to re-enter other cryptocurrencies when things turn better.

Stablecoins are also extremely useful to businesses and services within the crypto sphere because of the stability factor. From online merchants to the best crypto casinos, many platforms prefer stablecoins for transactions because they eliminate the risk of value fluctuation between the time a transaction is initiated and when it's completed. The predictability is essential to keep fair play in the games and make sure that a deposit of $100 today will still be worth $100 tomorrow. Stablecoins are especially favored by players on these platforms, since they can concentrate on the games they are playing without fear of their bankroll being eroded by market fluctuations. 

Also, with stablecoins, it is easier to provide regular bonuses and other promotions on gaming platforms, as the values are predictable. Most seasoned crypto gamblers now only use stablecoins to gamble, considering them digital cash that offers the same speed of crypto payments and the stability of fiat money.

The Ideal Tool to Use in Daily Spending

In addition to being a safe place to go during market turmoil, stablecoins are becoming more and more viable as a currency to use in daily purchases. They are perfect for making frequent purchases, paying bills, and transferring money between people. As opposed to traditional cryptocurrencies, you do not have to fear that your lunch money will decrease in value by 20 percent by the time you finally decide what to have.

Stablecoins are proving to be the ideal solution for many people, who are finding that they get the benefits of both worlds: the ease and speed of digital payments and the security of traditional money. You are able to transfer stablecoins to any place in the world in nearly real-time, and the fees are often cheaper than wires or other international payment providers. This is what makes them especially appealing to freelancers, remote workers, and everyone who has to pay internationally on a regular basis.

Stablecoins are also becoming more practical as they are increasingly accepted by more merchants and payment processors. Indeed, some individuals are paid their salary in stablecoins, particularly those employed in the crypto sector or by global firms which have the need to simplify payments.

Learn More

To dive into technical aspects of stablecoins, Webopedia provides explanations of blockchain technology, smart contracts and the mechanisms that make stablecoins work. By knowing these basics, you can make better choices about which stable coins to use.

The regulatory environment around stablecoins is also changing fast. Governments across the globe are trying to come up with clear guidelines on how stablecoins should be run, the reserves they are supposed to hold and how they are supposed to be audited. The industry is generally benefiting in these developments as there is more certainty and protection for users.

Risks and Considerations

Despite their supposed stability, there is still risk involved. The main issue is whether a company's assets match its claims. Some stablecoin providers have been scrutinised and care should be taken when choosing well-established stablecoin providers that regularly report on their reserves.

There is also the danger of depegging, in which a stablecoin briefly loses track with its intended value. This may occur when the market is under extreme stress or when there is a worry about the reserves of the issuer. Most depegging episodes are short-lived without a big impact, but they serve as a reminder that there is nothing in the world of finance that is totally risk-free.

Stablecoin risks include smart contract risks as well. The code or vulnerabilities may be a possible point of failure in the functionality of the stablecoin, though large stablecoins have so far been quite resistant and safe.

The Future of Stable Digital Money

Stablecoins are one important step towards cryptocurrency becoming more practical. With the technology maturing and the laws being better defined, we should expect stablecoins to see even greater mainstream use in everyday transactions, savings, and international payments.

The world is also seeing central banks creating their own digital currencies (CBDCs) that will compete and supplement the existing stablecoins. This should be a healthy competition and should encourage innovation and better the ecosystem as a whole towards stable digital money.

Stablecoins are an easy way to get into the world of crypto whether you want to hedge your crypto during market crashes, send money abroad, or just want to play with digital currency without the risk of volatility. They are demonstrating that cryptocurrency does not need to be a roller-coaster - sometimes, boring and stable is what you want.