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Stablecoins Explained & How They Can Help Stabilize Cryptocurrencies

By October 11, 2020 No Comments

Stablecoins, like USD Coin and Tether, are cryptocurrencies that offer a stable alternative to Bitcoin, due to their ties to real assets.

More people are starting to open up to the idea of investing in cryptocurrencies, and stablecoins offer a solution to a digital currency’s volatile nature. Cryptocurrencies can make individuals, in addition to banks and countries, nervous, but, stablecoins may open up new doors and financial opportunities for investors.

Cryptocurrencies typically work in a peer-to-peer setting, and this format diminishes the role of third-party groups. Essentially, people can use digital currencies, like Bitcoin, to remove banks from the money exchange equation. However, some countries, like the Bahamas and Sweden, are beginning to set up Central Bank Digital Currencies (CBDC) with the goal of creating state-backed cryptocurrencies. These countries can regulate digital currencies, like real money. In contrast, Bitcoin regulates itself with Bitcoin mining to stop double-spending.

Related: How to Use Samsung Smartphones to Buy & Sell Cryptocurrencies

Stablecoins, like USD Coin (USDC) and Tether (USDT), are a cryptocurrency that can give banks and countries a role while people store their money in digital wallets. As Investopedia explains, Stablecoins differ from other cryptocurrencies because they have reserved assets, and as a result, people can invest without worrying that the value of the token will rapidly change. USDC and USDT have collateral based on a fiat reserve, which means that a digital token’s value is attached to the value of gold or the US dollar.

A Closer Look At USD Coin & Tether

USDC has ties to the American dollar, as well as Circle and Coinbase, with the reserved assets allowing people to exchange USDC for the fiat currency. As a digital version of the American dollar, it is created in a similar way and does not appear randomly; a person exchanges it in a 1:1 ratio after contacting the proper issuer. Goldman Sachs backs Circle, according to Cryptonews, but it is important to acknowledge that there are independent transparency reports.

Another example, USDT, is allegedly tied to the American dollar, although it lacks confirmation or any audit, according to Cryptonews. Compared to USD Coin, Tether does not have the same bank background, but there are several founders, including Brock Pierce, Craig Sellars and Reeve Collins. As of 2018, there were at least 1.8 billion Tether coins circulating, out of a total supply of 2.6 billion.

Stablecoins have collateral in the form of fiat currency reserves, other cryptocurrencies, and even an algorithm. For simplification, USD Coin and Tether are examples of stablecoins that have fiat currency reserves. USDC’s connection to a bank may ease an investor’s concern, and the transparency reports help remove doubt and demonstrate that the value of these tokens does not change wildly. These cryptocurrencies may have a future with the American banking system and can help when performing peer-to-peer financing but, have banks as a back-up. Stablecoins could help the United States pioneer its own version of CBDC, and it will likely have regulations that reflect normal currency. Overall, cryptocurrencies have a volatile nature, but a stablecoin’s collateral, and ties to real currency, can help keep the value stable, which may create new opportunities for banks and investors.

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