Institutional investors are showing an increased interest in stablecoins, but many investors lack the tools needed to gain access and entry to the crypto space and to manage volatility, reduce uncertainty, and facilitate trade – the very benefits provided by stablecoins. Here is what you need to know about stablecoins and how Wisebitcoin can impact the market’s trajectory.
The swift and rather abrupt rise in the price of Bitcoin and many other leading crypto assets have brought with it not just intrigue but also a concern for unmanageable (and unpredictable) price volatility – something that is of particular interest to professional traders.
Institutional investors seem ready to build allocations for Bitcoin and other cryptocurrencies, evidenced by the entry of JPMorgan and several other prominent players into the space over the past few months. However, digital assets’ intrinsic volatility is a serious detractor that is preventing cryptocurrency adoption by the masses since you cannot reliably use an asset as a medium of exchange if its value fluctuates wildly.
This is why stablecoins were developed, and they have been receiving a great deal of attention as investors of all kinds look for effective exposure to digital assets.
What Are Stablecoins?
Stablecoins are cryptocurrencies that are designed to maintain a fixed or stable price. Price can be pegged to a fiat currency, a basket of currencies, a commodity, or a basket of commodities. With their prices stable, stablecoins can bridge the divide between digital and fiat ecosystems and can provide users with the best of both worlds: manageable volatility and the benefits of decentralization, security, transparency, and even anonymous or semi-anonymous payments that can be powered by blockchain technology.
How They Work
Stablecoins typically use one of three pegging methods.
Algorithmic Pegging: This approach uses smart contracts, and they are not collateralized, although the token issuer may maintain a stock of reserves just in case. The issuer can simply “print/mint” or release more tokens to the market if the price is higher than the pegged value (usually 1 USD) or burn tokens to reduce supply if the price is too low.
Fiat Pegging: This approach uses fiat currency as collateral in a fixed ratio to maintain price. For example, if users hold 1 billion USD worth of a token, the issue will hold 1 billion USD as collateral. Supply can only be increased, and more tokens can only be issued if the issuer holds more and more USD in its vault as collateral in a ratio equivalent to the number of new tokens issued.
Crypto Pegging: In this approach, the issuer uses smart contracts and cryptocurrencies as collateral. The cryptocurrencies – usually a basket of high market cap tokens – are programmatically managed to maintain a certain value equal to the value of tokens in supply. For example, the Dai Stablecoin System, which was rebranded to “the Maker Protocol,” accepts any Ethereum-based asset that has been approved by MKR holders as collateral. MKR holders also vote on the risk parameters for each asset used as collateral. In this way, risk and, by extension the value of a token can be programmatically managed.
There are a few drawbacks to be aware of with each of the three approaches above.
For example, algorithmic pegging does not come with reserves or collateral to justify purchasing a token that is not backed by anything of value, while fiat pegging suffers from centralization and a lack of transparency. Crypto pegging can be difficult for the average user to understand and adopt, especially if the codebase used to manage the collateral basket is not open-sourced.
How Stablecoins Are Impacting the Market
Despite these issues, the following list of benefits clarifies how stablecoins can help investors of all kinds – from private individuals to large institutions and hedge funds.
- They can be pegged to any asset, increasing use-cases for projects of many types.
- They allow you to use your crypto holdings as fiat.
- They help you overcome market volatility and uncertainty.
- They can help reach and provide services to the unbanked.
- They are easier to understand than many other crypto assets and tokens.
- Their value proposition and uses are clear.
The explosive growth of stablecoins in recent months to a total value of about $80 billion from roughly $20 billion about a year ago is a testament to the benefits and applications that stablecoins can provide. However, there are serious market challenges that must be overcome if investors are to extract maximum benefit from the value proposition of stablecoins.
Stablecoins – and cryptocurrencies in general – can only enjoy widespread use and adoption if we have a way for retail and institutional investors to overcome the following issues.
- Fiat-based stablecoin projects need traditional banking relationships to hold fiat currencies as collateral. Issues with a brand name, reputation, regulatory uncertainty, and compliance risks currently prevent such relationships from blossoming.
- Smaller banks are often unable to provide collateral to the tens of billions of dollars worth of crypto tokens issued as stablecoins, creating solvency and credit risks for them.
- Mature and performant services are required for transaction validation, accounting, certification, and reconciliation at the bank level, which is difficult to do with current best-in-class solutions.
- The legitimacy and long-term viability of certain stablecoins may be based on investor expectations, so transparency and ease-of-use are key.
- Many stablecoin projects want to compete with fiat currencies on a global scale and want to move beyond use for trading in cryptocurrencies, but investors are limited by the strengths and weaknesses of the tools available to them.
How Wisebitcoin Can Help
This is where Wisebitcoin and its suite of professional trading tools can help.
Wisebitcoin was created to meet the trading and investment needs of professional traders. It provides enterprise-grade trading tools to a network that boasts over $6 billion in daily trading volumes and is used by roughly 280 merchants and 15 million individuals.
High transaction speeds on the platform can help shield users against losses even when there is considerable volatility in the market, and the exchange supports over 100 stablecoins and helps facilitate perpetual futures trading for coin-swaps using denominations in USDT or other preferred coins. In this way, investors can secure short or long positions based on their assessment of price movements. Furthermore, Wisebitcoin supports trades with up to x100 leverage, not to mention trading and investment in leveraged ETFs.
Wisebitcoin also provides 24/7 live support in multiple languages, an intuitive user interface, native apps, cold wallet storage, and an array of trading and investment tools that can better connect retail investors, professional traders, and financial institutions.
Learn more about the platform by visiting Wisebitcoin where you can sign up or learn more about how Wisebitcoin brings stablecoins – and their many benefits – to crypto and traditional investors.