You might have heard of Stablecoins before if you know anything about cryptocurrency. They’re all the rage in some circles, and they’re gaining prominence.
If you don’t know about them yet, get ready for a quick overview. We’ll cover what you can do with them and why they’re a better option than some other popular crypto forms.
What Exactly Are Stablecoins?
A Stablecoin is a kind of cryptocurrency. The designers made it so that it would remain approximately the same price. Stablecoins can offer more stability than other cryptocurrencies, so you don’t have to worry about the wild market fluctuations that can sometimes accompany other forms, like Bitcoin, Ethereum, etc.
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When you buy Stablecoin, you’re typically getting a crypto form that the designer pegs to a commodity or currency. An algorithm also regulates its supply. Again, this means more market stability for buying, trading, and investing.
What Does Buying Stablecoins Mean for a Crypto Trader?
Crypto trading appeals to some individuals who want to get rich quickly. Some find success that way, while others can quickly lose their shirt in a bear market. In that respect, you can look at crypto trading like the stock market.
However, some crypto traders aren’t sure about Stablecoin stability, even with the built-in safeguards. They want to know whether a Stablecoin investment can crash, similar to investing in a different crypto form.
The main thing to understand about Stablecoins is that they can still crash, even with the currency or commodity connection. The real question becomes whether enough Stablecoins exist that tie directly into its backing asset.
In other words, say you buy some USDTs. They tie into the US dollar, so one USDT equals one dollar. The reserves need to match the number of Stablecoins that you can buy.
That allows you to avoid price fluctuation and maintain stability. If you have a crypto investment portfolio that’s less than 100% Stablecoins, you might face a crash.
Companies that hoard a lot of their backed reserves risk their Stablecoin crashing. If you’re not a part of that company, though, you may not know how much of their particular Stablecoin they’re keeping in reserve. That can work against you as an investor.
How Companies Store Reserves
Say that you have a company with its own unique Stablecoin. How it stores its reserves can mean success for a trader or disaster if they have that particular Stablecoin as a large part of their portfolio.
If a company owns a vast amount of its Stablecoin, it might promise to store that crypto in fiat currencies. A fiat currency is something like the US dollar. It’s a currency form that a country adopts as its own.
However, the company decides to take that large reserve and put their Stablecoin into another crypto form instead. They’re essentially speculating that this other coin will do well.
If that happens, they’re risking their own Stablecoin’s stability. They’re potentially endangering an investor’s market strategy without telling them. It’s unethical, but some companies do it.
If an investor feels that a company is playing fast and loose with its own Stablecoin stores, they might decide to pull all of their money out of that particular one. That can bring down the coin’s liquidity.
This can cause a crash. If you are going to put a lot of money into a Stablecoin, you want to try and choose one that comes from a company you trust. That’s probably a business that has collateralized investments.
Can Governments Regulate Stablecoins?
This is a tricky question. Much of the crypto market remains unregulated, and that’s what some people like about it. Although the Biden administration has signed a legislature regarding crypto, significant challenges arise whenever the government tries to enforce it. For now, crypto remains the Wild West.
That’s true for Stablecoins as well as other crypto forms. Many investors want to put their cash into Stablecoins since they feel their value can appreciate, and they’re less likely to crash than other crypto varieties. We just detailed a way that a Stablecoin’s can still nosedive, though.
Some governments believe companies use Stablecoins for illegal activities, or they fear that possibility. If you use a Stablecoin and pay for something with it, it’s a lot harder for a government to keep track of that and tax your purchases. You don’t have to involve financial institutions with such a transaction, so you can also potentially buy something illegal or unethical.
The US does want to regulate Stablecoins, just like other crypto forms. What’s not entirely clear is the timetable when you, as an investor, can expect that to happen.
What About Hacking?
If you’re going to look into Stablecoins as an investment, you might want to know about hacking. You can put your Stablecoins in a digital wallet and store them there like you can with other crypto forms. That makes your transactions easier.
However, putting your crypto in a wallet means hacking remains possible. It’s not likely, with security safeguards most crypto storage sites and platforms implement. Still, hackers always work to find ways to steal online funds and valuables, and that’s true for crypto just as much as for anything else.
Any time you use a crypto exchange, you should know vulnerabilities can exist. Some platforms boast that they have the latest security technology available to them, but breaches can still potentially occur.
Since your wallet or a crypto platform you use can have vulnerabilities, you might want to store your Stablecoins or other crypto investments on an insured platform. If you use one like Nexo, it has safeguards in place that protect your crypto assets, just like the FDIC protects banks. The platform will compensate you if someone steals your assets.
In short, Stablecoins do provide more stability than most other crypto forms, but they remain unregulated, and it’s not impossible for them to crash. It’s also possible for hackers to steal them, so try to use an insured platform for storage.