Stablecoins are important assets that play prominent roles in the crypto space. Their ability to help with transfers is notable, but traders also have a lot to benefit from as they provide significant stability and an opportunity to hedge their wealth.
It is especially more important in today’s market, with different stablecoin options providing traders with variety and an opportunity to diversify. Stablecoins might not provide the type of gains that you will be used to seeing with other assets, but they shine brightest when the market takes a dive and you need help.
Stablecoins: What Are They?
In its simplest sense, a stablecoin is a type of asset whose value is tied to that of a fiat currency. The fiat currency could be any - the Dollar, Pound, etc. As long as the asset is recognized, the stablecoin will be as well.
The stability of stablecoin comes as a stark contrast to the volatility seen in everyday crypto assets. People who buy and trade cryptocurrencies understand that their values switch by the second - an asset could lose or gain as much as 20 percent or even 30 percent in a day.
This volatility plays to the benefit of crypto holders. In 2021 alone, there have been multiple weeks where an asset like Dogecoin will gain over 300 percent in a single week. Compare that to investment assets like gold and traditional stocks, and you could go years without getting as much as a 50 percent increase.
But, this volatility can also occasionally be the doom of a crypto investor. Take the downturn that came in May - in less than a week, the crypto market had lost almost 50 percent of its total value. Bitcoin dropped from $64,000 to just over $28,000, and other large-cap assets saw double-digit drops as well.
When it comes to crypto, volatility is a double-edged sword - a blessing and a curse at the same time.
Stablecoins change that. They provide a sense of stability since their values are pegged to fiat currencies instead. Essentially, they stay the same as long as the fiat currencies they get pegged to don’t lose value as well.
How Stablecoins Help in Trading
The same benefit of stability is what crypto traders get when they use stablecoins. These assets hold their own, especially when the market dives.
There’s even a name for the phenomenon - Tethering. Simplifying it -- It is the act of converting your coins to Tether when the market dives. Thanks to this, you get the flexibility to do whatever you want - you can convert immediately to cash and sell out of your positions, or you could bid some time if you think that buying the dip will be the best play for you.
Fiat onramps can be expensive for everyone. Thanks to this, stablecoins are a much better solution for institutional investors and exchanges looking to reduce their crypto exposure without cashing out entirely. Exchanges like Binance and Huobi have seen significant use of stablecoins in the past few years as traders use stablecoins to navigate the market and adjust their exposure when it matters.
Stablecoins Are More than Just Trade Balancers
Of course, it is worth noting that stablecoins do more than just improve a trader’s ability to keep markets stable.
One area where these assets have become much more effective is in cross-border payments. Even with innovations like PayPal and Stripe, making payments across countries is still painfully tedious. The process is slow, and it can be quite costly as well. Blockchain and crypto solutions like XRP have been developed to provide a means of transacting much better. Still, stablecoins provide the prospect of even better operations since their values are much more stable.
Stablecoins can also help with payments - especially for companies looking to optimize their payroll management. There is a growing number of companies choosing to pay their staff in cryptocurrencies today. But, the volatility of traditional cryptocurrencies means that it can be a challenge to pay people the fair value of their worth. With stablecoins, you get to make crypto payments and still preserve the value of your workers’ salaries.
If the workers want to convert their stablecoins to other cryptocurrencies because they believe they can get richer, they’re free to do that. But, your job is inherently to help keep these workers and their salaries safe. With stablecoins, your task becomes much less arduous.
In general, stablecoins are a very welcome asset class that should be embraced more. They’ve shown to have significant benefits for everyone, regardless of how they are used. In an industry where asset prices have incredible and unpredictable swings, stablecoins provide a much-needed calming influence.