What are Stablecoins and how do they differ from other cryptocurrencies?

Stablecoins avoid the downward pressures of the market, but how?

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a woman with a mobile phone in her hand looks sceptical wity a puzzled expression on her face with an eyebrow raised and pursed lips. wondering how Stablecoins differ from other cryptocurrencies

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Key points

  • Stablecoins are different from other cryptocurrencies
  • They’re backed by another asset, often a more traditional one
  • Stablecoins are far less susceptible to market moves due to their backing
  • Investors can still earn returns from Stablecoins through various platforms

It’s been a tumultuous past few months for cryptocurrency. The market has seen wild fluctuations in value, with Bitcoin (CRYPTO: BTC) and other digital currencies plummeting in price. However, one sub-category of digital currencies has been largely immune to the cryptocurrency bloodbath: Stablecoins.

In this article, we will explore the unique characteristics that set Stablecoins apart from other cryptocurrencies.

What are Stablecoins?

It turns out the wild, wild world of crypto is not completely consumed by volatility. Indeed, even the speculative landscape of cryptocurrency demands a need for stability. Perhaps more so than traditional assets.

The solution… Stablecoins.

Put simply, Stablecoins are cryptocurrency tokens that have been pegged to another asset with a more stable value. To date, most Stablecoins have been backed by either a fiat currency or a cryptocurrency.

In other words, the value fluctuates in tandem with the value of a ‘steady’ asset. The largest Stablecoins in the world by market capitalisation all use the United States dollar as their reference point.

USD Coin (CRYPTO: USDC), for example, is pegged to the US dollar and each USDC token is supposedly backed by a real-world dollar held in reserve. Other notable examples include Tether (CRYPTO: USDT) and Dai (CRYPTO: DAI).

StablecoinPrice (USD)Market capitalisation (USD)
Tether$1.00$77.97 billion
USD Coin$0.9999$50.42 billion
Binance USD$1.00$15.78 billion
TerraUSD$0.9994$11.28 billion
Dai$1.00$9.64 billion
TrueUSD$1.00$1.51 billion
Pax Dollar$1.00$0.94 billion
Neutrino USD$0.9771$0.47 billion
Fei USD$0.994$0.42 billion
Tribe$0.6802$0.31 billion
Source: CoinMarketCap

While many of the above Stablecoins are fiat-backed, there are other options open to investors. For the more decentralised-desiring crypto enthusiasts, Stablecoins also come in crypto-backed and algorithmic forms, removing the link to central banks.

How do they differ from other cryptocurrencies?

The key difference between Stablecoins and other forms of cryptocurrency is that they are not beholden to the whims of the market.

Their stability makes them attractive to many cryptocurrency advocates, as they can safely store their money in Stablecoins without fear that their value will fluctuate significantly. But they still offer most of the benefits associated with cryptocurrency.

While the removal of the downside risk is appealing, keep in mind the upside is no longer present. However, crypto users can take advantage of attractive yields offered on Stablecoins across various platforms at their discretion.

Unlike traditional cryptocurrencies, this is one of the only ways to accrue returns while holding the token.

Motley Fool contributor Mitchell Lawler owns Bitcoin. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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