Stablecoins, as the name suggests, are digital coins or tokens that maintain a stable value. They are typically pegged 1:1 with the US dollar, although a stablecoin can be pegged to anything, such as an ounce of gold, various fiat currencies, or even a basket of goods. Here we talk about how stable value stablecoins can be used as a hedge against volatility.
“Volatility” and “uncertainty” have become synonymous with the crypto world. As the saying goes, double-digit percentage changes in traditional markets are rare; in the crypto world, double-digit percentage changes are a quiet Wednesday afternoon!
To help manage this volatility, stablecoins have been developed. These are tokens that maintain a constant value. Irrespective of market movements, a stablecoin will always have the same value, and this provides traders with an escape to safety when there is market turbulence and uncertainty.
How Stablecoins Help Investors Manage Volatility
To understand how stablecoins can help protect investor portfolios and manage volatility, consider the following example.
Let’s say Bitcoin is trading at $60,000. However, due to wild swings, the price jumps up and down several thousand dollars every few hours. To protect their portfolios from this volatility, traders can purchase 60,000 units of a stablecoin to have $60,000 worth of tokens. Once the markets calm down, he or she can then trade those stablecoins back to Bitcoin and still have $60,000 worth of Bitcoin. This is advantageous to traders who do not want to risk the potential loss of having their BTC fall below $60,000, even if the price could potentially rise above that level.
Other Uses of Stablecoins
In addition to their primary role of helping to hedge against volatility, stablecoins also have other functions, two of which are outlined below.
Replacing fiat currency for everyday purchases: A major hurdle to crypto adoption is volatility. If you purchase something for 1 ETH that is worth, say, $2,000, but the price falls by the time the merchant cashes out that token, he/she will have lost value. On the contrary, if the price rises, you will have lost value.
By using stablecoins as a replacement for fiat, buyers and sellers are always guaranteed a fixed value for the tokens they spend or receive, which makes it easier to use crypto for everyday transactions.
Banking services: In countries that do not have reliable banking services or there is limited access to capital, stablecoins can be used for saving, lending, and investing. Stablecoins provide an easy and effective inroad to the crypto and digital trading economies as well, and they can provide traders and investors with access to a wide range of DeFi products that currently do not effectively work with traditional financial systems.
Three of the most popular stablecoins on the market today are described below.
USDT is the ticker symbol for Tether, a stablecoin that is pegged 1:1 with the US Dollar. It works on many different blockchains and is supported on many exchanges, and it makes it easy to send and receive Tether around the world in lieu of sending USD and incurring high transfer and wire/transaction fees.
USDC is an Ethereum-based stablecoin that was created by Circle and Coinbase. USDC is also pegged 1:1 with the US Dollar and it can be used as a hedge against inflation and as a safe haven when there is extreme volatility in the market.
TUSD is the ticker symbol of TrueUSD, an Ethereum-based token that was created by Trust Token, a project that is working to create better financial opportunities and a better, more frictionless global financial ecosystem. While TUSD is pegged to the US Dollar, Trust Token has also issued TGBP, which is pegged to the British Pound, TAUD, which is pegged to the Australian Dollar, TCAD, which is pegged to the Canadian Dollar, and THKD, which is pegged to the Hong Kong Dollar.
Invest in Cryptocurrencies and Learn How to Leverage Stablecoins with Wisebitcoin Today!
Stablecoins are a creative innovation that not only show the flexibility and user-friendliness of many crypto and DeFi products and solutions but also help traders manage the uncertainties and risks often associated with crypto and DeFi trade and investment.
If you are interested in crypto trade or investment but are worried about market volatility, then look no further. Wisebitcoin makes it easy to buy, sell, and understand cryptocurrencies, and our platform also supports Tether, the world’s most popular stablecoin. Learn more about crypto trade and create your own digital asset portfolio by visiting Wisebitcoin.