If there is one area, which has plagued cryptocurrencies like Bitcoin for the longest time, it is stability. The price fluctuations and the subsequent volatility has been a major reason, which has prevented them from truly going mainstream.
Critics and detractors point to the unstable nature of Bitcoins, Ethereum, and other cryptocurrencies to woo the masses away from trading and investing. However, in 2021, investors might be looking at a new and effective solution to the same- Stablecoins.
In this article, we are going to discuss the phenomena of Stablecoins and state why as an investor, you should start paying closer attention to them.
Stablecoins: Meaning and Definition
According to the leading cryptocurrency trading platform, Bitcoin can buy, easily as Stablecoins which are very much similar to other cryptocurrencies like Bitcoin. However, unlike Cryptocurrencies, which cannot be backed up against physical values, Stablecoins do have a backup.
This physical back-up, which is often in the form of assets like gold, currency, and commodities like oil, helps guard their valuation against multiple forces. This is a neat little trick to ensure that you are able to enjoy all the benefits, which cryptocurrencies get while eliminating the single biggest criticism attached to their name.
The Three Main Types of Stablecoins currently in the Market
- Stablecoins backed by Traditional Currencies-
This is the most popular kind of Stablecoins you will be able to invest in currently in the market. These digital currencies are backed by the value of a national currency. For example, American Dollars or British Pounds of even the Japanese Yen.
There is a reserve of the currency, which is held by the nation’s Central Bank. This helps in dictating the valuation and prevents the digital currency from experiencing price fluctuations. Governments are experimenting with them to boost their financial systems.
- Stablecoins backed by Commodities-
We all know commodities like gold and oil have held on to their values for a very long time. Yes, there are variances from time to time, but international governments use oil and gold reserves to assess the standing of their economies.
This is why Stablecoins backed by commodities are safer and efficient. The calculation usually relates to matching the value of say, one pound of gold to Stablecoins, or one barrel of oil. This helps others to understand the value fixing attached to Stablecoins.
- Stablecoins backed by Other Cryptocurrencies-
You might be forgiven for thinking that this strategy is self-contradictory in nature. However, in real-world terms, it works. In such a system, the price of a Stablecoin is backed by Cryptocurrencies. The only condition is that the crypto reserves need to be much higher.
In other words, higher crypto reserves back less Stablecoins to ensure protection to their circulation and value. This helps in ensuring security for investments and brings in the much-needed stability, which Stablecoins are famous for.
Should you Invest in Stablecoins in 2021?
According to leading experts, there is no harm in engaging and investing with Stablecoins in the near future. In fact, some investors have already diversified their crypto portfolios by picking up some Stablecoins.
If you have been reading the article carefully, you will realize that governments and official institutions are involved in backing up the different types of Stablecoins, barring the last one.
This means that in terms of acceptability and use, Stablecoins can outperform even Bitcoins or Ethereum. However, that being said, the norms, rules, and regulations, which come with governmental interference are something, which investors should be ready to accept.
The Final Word
There are multiple reasons why you as a trader or an investor should look to engage with Stablecoins. If you want to look at comparisons, Stablecoins are very similar to Central Bank Digital Currencies or CBDCs.
This means that they are going to have a definite future in an increasingly digital payments world in the near future. Do you think investing in Stablecoins is a good idea? Drop credible suggestions and pointers below.