Guide to Using StableCoins to Increase and Protect Your Assets
2019 Complete StableCoin Guide
Part 7 of 7
Enjoy shorts from my book while Kyle Rea of cREAtiveCastleStudios finishes graphics!
If you haven’t read the first part of my book, you may “catch up” here.
Simply stated, a StableCoin is a cryptocurrency pegged to another asset. Or, a global digital currency solely unrelated to a central entity. StableCoins make for practical usage of cryptocurrencies by allowing for secure, convenient transactions without the high volatility traditional cryptocurrencies hold.
Now let’s move on….
Types of Stablecoins: Asset-Collateralized vs. Non-Collateralized
The socially agreed upon currency most countries use is termed ‘fiat’, which literally means ‘something that was created without effort.” Until 1971 world currencies were backed by gold. Before printed money; diamonds, silver, gold, land, estate and other goods were used as means for barter. Shifting from an asset backed currency to the current fiat system left centralized banks, governments, financial technologists, private entities, and economic experts with the concept of Asset-Collateralized StableCoins. These specific StableCoins’ purpose is to tokenize stable assets on a blockchain serving as a digital currency for means of speedy, secure and stable daily transactions. Stablecoins in this category should be guaranteed to exchange 1 : 1 StableCoin for its underlying asset.
One argument states, fiat is not backed by any tangible asset, therefore; why should cryptocurrency only have value as an asset-backed currency? An opposing argument suggests currency merely must have an agreed upon “value” to be successful. Non-Collateralized Stablecoins were created as a medium. This category of digital currency is not backed by any “real-world” or cryptocurrency asset; but instead, maintains value by its users expectations of maintaining a certain value. The only current noted Non-Collateralized approach is the Seigniorage Supply (Algorithmic) StableCoin Model.
Each Category Broken Down
I’ve separated StableCoins into three different categories. three are Asset-Collateralized, one is Non-Collateralized and the remaining group is a Hybrid category. This is in hopes of a more simplistic understanding for us all.
First Asset-Collateralized StableCoins, Fiat-Collateralized. My Medium publication is here.
Second, we covered Fiat-Collateralized StableCoins. That article can be viewed here.
We then switched things up a bit and visited the only Non-Collateralized StableCoin Category, Seigniorage Supply (Algorithmic) StableCoin Model. Enjoy the description of the futuristic currency model here.
Next was a simple to understand category among a Asset-Collateralized group; Metal-Collateralized Stablecoins with a long list of promising projects found here.
Lastly was a short tale tying everything together with our Hybrid StableCoin category. Find this list of exciting projects and description here.
Now what to do with these things….
How to Protect your Assets Using StableCoins.
The information gathered from pages of sources I’ve put put together in this E-book will leave readers confident in their knowledge of StableCoins. Muhammad Tahir-ul-Qadri stated, “If knowledge is not put into practice, it does not benefit one.”
As an educated individual there’s a few things you can do so your newly acquired wisdom, and time is not wasted.
- Quickly Trade Fiat to Cryptocurrency. Nearly every exchange in existence allows crypto to crypto trading. Very few exchanges allow you to trade crypto directly for fiat. This is where StableCoins are particularly beneficial in today’s digital currency trading market. Many StableCoins are 1:1 equivalent to fiat, therefore, investors can almost instantly sell crypto for StableCoins and quickly trade to fiat, without leaving preferred cryptocurrency exchange.
- Be Among the first in the Fintech space. There’s no question digital currency is the future. Milton Friedman, 1976 Nobel Memorial Prize winner in Economic Sciences for his research on consumption analysis, monetary history, theory and the complexity of stabilization policy, famously quoted, “I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed, is a reliable e-cash.”. Daily use of StableCoins allows riskless, interchangeable payments with fiat but with secure and digital benefits. StableCoins can be used for convenience, which catches the attention of your peers. StableCoins can then be used as an educational bridge for cryptocurrency, as blockchain technology continues to develop from its infancy.
- Use StableCoins to Protect your assets. Using ‘Stop Loss”, “Hedging” and “Harvesting” Strategies discussed on the following pages in detail.
How to Protect your Assets with “Stop Loss Method”.
When trading, it’s hard enough to correctly time one market let alone two. The last thing anyone wants is to watch investment profits disappear before their eyes.
For less advanced crypto-traders;
“Typical” Cryptocurrency Exchange Steps are as follows;
- Obtain Bitcoin or top Altcoin with centralized fiat-to-cryptocurrency exchange platform. (Allowing deposits)
- Transfer cryptocurrency to preferred digital currency trading exchange.
- Trade, obtain, exchange, etc. on preferred trading exchange.
- To trade newly obtained crypto for fiat or protect assets in fluctuating market; trade crypto back to Bitcoin or top Altcoin on preferred trading exchange.
- Transfer cryptocurrency to centralized cryptocurrency-to-fiat exchange. (Allowing withdrawals)
- Sell Bitcoin or Altcoin on exchange and withdraw to your bank account.
- Wait 3–7 days for bank transfer.
Added fees with each exchange/transfer/trade/buy/sell
Stop Loss Method Defined.
To stop loss in a volatile cryptocurrency market, simply exchange digital currency for StableCoins.
Use ‘hedging’ and ‘harvesting’ (discussed below) to gain a profit in a declining market.
In the event Bitcoin is having one of its “Bart Chart” moments. (See photo) Every two to three minutes the overall value changes 10 to 20%. A portfolio can take a hit while waiting for Bitcoin to send from one exchange to another.
It typically only takes ten minutes for a transfer. That is, unless the exchange platform is experiencing heavy volume and it takes an extra five minutes to process the send. If the exchange is backed up, chances are the Bitcoin network is as well, this can add another five or more minutes per transaction.
We’ve all been there… You keep refreshing the page while the exchange waits for enough confirmations to consider it approved. Now you can START to trade it for fiat! NOW your profits are safe!
A few minutes here, a few minutes there… it all adds up. In that 10 to 20, maybe 30 minutes, what’s happened to the price of Bitcoin? A lot.
A “whale”, another ban from China, or CNBC reporting “Bitcoin Died (Again) Today” can show a 30% decrease in your portfolio.
Stablecoins, while certainly not guaranteed to hold their value, provide a much more likely way to solidify profits. Using them to as a method to stop loss during market dips can save a trader a great deal of loss.
How to Protect your Assets. Hedging and Harvesting.
Considering volatility, hedging and harvesting are wise, yet advanced investing strategies that’ll lower the overall risk found in a cryptocurrency portfolio. This method manages safe, effective increase in profits and saves the investor; time, exchange fees, transfer charges, and transaction costs.
Simply explained; one trades fluctuating cryptocurrency investments into StableCoins to rebalance portfolio in market dips to secure more investments, and reinvest profits gained during market highs.
Hedging with StableCoins
Definition: Textbooks state “a Hedge is an investment to reduce the risk of adverse price movements in an asset.”
Investopedia says, “One must use various instruments in a strategic fashion to offset the risk of adverse price movements in the market. The best way to do this is to make another investment in a targeted and controlled way.”
Heading is a complex investment technique utilized to reduce risk. A successful hedge shows no portfolio losses.
Portfolio begins with $1000; 50% Bitcoin and 50% StableCoin.
In the event the Cryptocurrency Market Decreases by 20%, the portfolio is over-allocated to a StableCoin (55.56%) and under-allocated in Bitcoin (44.44%).
To rebalance portfolio, buy 50$. BTC with StableCoins. The portfolio is once again 50/50.
Thanks to the StableCoin security, there’s minimal loss in overall portfolio. Bitcoin only decreases comparatively to the US Dollar . Investor’s actual amount of Bitcoin held does not change .
In rebalancing the portfolio the investor accumulates more Bitcoin at market dips. This is beneficial in a market increase and our Harvesting scenario.
Harvesting Bitcoin Profits while Hedging with StableCoins
Definition. “The Harvesting method is commonly referred to as an exit strategy, as investors seek to exit the investment after its success. Investors will use a harvest strategy to collect the profit from their investment so that fund can be reinvested into new ventures.” Investopedia says.
Employing a harvest strategy will allow one to harvest maximum profits before market reaches a decline stage.
In the event the Cryptocurrency Market Increases by 20%, this portfolio is will hold more value in Bitcoin.
Harvesting consists of taking the Bitcoin profit and reinvesting. Rebalance portfolio by taking the 20% Bitcoin profit and purchase StableCoins.
Portfolio is once again 50/50, however your Return on Investment (ROI) has increased.
The Future of StableCoins; Final Thoughts
cointelegraph writes, “Various models of stablecoins have surged in popularity last year… research firm Diar published an analysis saying that the adoption of stablecoins is growing based on the increasing number of on-chain transactions. As per the study, the same four major stablecoins to date have broken the $5 billion mark in on-chain transactions within the three-month period”.
StableCoins are already considered commodities and traded among crypto exchanges. Naturally, during cryptocurrency market fluctuations, StableCoins hold their value better. An example of this was during the largest cryptocurrency market crash when many currencies dropped 30–70%. Tether, a USD-backed StableCoin, held out within 8%.
Whether you’re ‘for’ or ‘against’ this type of digital currency, most can agree there would be great convenience in a high-quality StableCoin, allowing use of fiat on crypto exchanges, in today’s world. Stablecoins allow users to be relatively quiet for their assets taking advantage of many positive aspects of crypto economy.
Crypto- Enthusiasts will argue StableCoins are not cryptocurrencies on the basis that they’re;
- Centralized. Some users aren’t sure binding to a traditional banking system can provide a decentralizovannost and anonymity to the owner.
- Backed by an ‘illusion’. Some argue cryptocurrency is ‘fake money’, however, fiat was backed by gold until the 1970’s and now has no asset standing behind it.
- Cryptocurrency represents a unique code written down in memory of an unhackable computer network, or a digital ledger. Adding a traditional asset often demands special storage conditions, funds for providing these conditions and requires a third party to be involved for auditing. Once again defeating the entire purpose of cryptocurrency economy.
StableCoins with real-world value assets can be used in everyday life; which opens the door to overall cryptocurrency adoption. After a majority use digital cash, say in the form of StableCoins, the cryptocurrency community can better education on the benefits of decentralization and need for a trustless cash exchange. With digital cash experience, there’s less to learn in a new, highly complex, and ever evolving financial technology ecosystem. Crypto-Enthusiasts can’t disagree StableCoins could be the key to more people using Bitcoin and AltCoins in the future.
In conclusion, StableCoins may be a crucial element for a dynamic cryptocurrency future. Advancing mainstream cryptocurrency adoption may require StableCoins as viable hedging mechanism in the highly volatile market.
This concludes the small ‘short’ from an upcoming E-book. Stay tuned for more, and help a lady trying to serve the Women In Blockchain and The Tech News community out. How?
Tell me what you think.
- What am I missing?
- What would you add?
- What’s your personal opinion on StableCoins?
I’d love to professionally discuss, collaborate and connect with you all. Would love any feedback, positive and negative; as I’m only here to improve and educate myself/others.