Stablecoins: Hedging Against Market Volatility
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When Bitcoin was first created, people saw it as a great way to make peer-to-peer transactions. Bitcoin was was touted as a payment method that would allow for more privacy, transparency, and a way to ease the difficulty and costs of cross-border transactions.
Bitcoin is still used as a payment method, but it’s also seen as a speculative asset and often behaves as such, despite the original intent. As a result, Bitcoin can be highly volatile, often making it less desirable as a method of payment.
Bitcoin has a variety of use cases, which will continue to grow and solidify as the industry advances. However, for those who desire or are in need of an alternative, stable currency, the crypto space developed stablecoins as a solution. Many stablecoins are tied to assets like fiat (ex. the US dollar) or gold, giving users the knowledge that the price is pegged to a familiar asset and the ability to hedge against other, more volatile cryptocurrencies.
Tether is a stablecoin backed by fiat currencies like the dollar and euro. It is implemented on various blockchains like the Ethereum blockchain, and is supported by a host of exchanges like Poloniex, HitBTC, and Bitfinex. Tether’s fiat-backing and use of blockchain technology creates a form of digital cash, easily sent and received around the world. Earlier this year, Tether launched XAUT, a gold-backed stablecoin.
USDC is an ERC-20 stablecoin created by Circle and Coinbase. For every USDC in the world, the organizations have $1 in the bank. As a stablecoin, USDC acts like digital cash, allowing people to hold an asset of equal value to the dollar, and move it easily around the world. In developing nations, this would allow people to transfer funds without the costs associated with cross-border transactions.
TrueUSD is an ERC-20 token created by Trust Token, a company working to create more financial opportunities and support more frictionless global trade infrastructure. While TUSD is a stablecoin tied to USD, Trust Token also has TGBP (British pound), TAUD (Australian dollar), TCAD (Canadian dollar), and THKD (Hong Kong dollar), all tracking and tied to major global currencies.
PAX is an ERC-20 stablecoin created by Paxos, a company looking to bridge the gap between traditional finance and the innovative technologies of the crypto space. PAX is supported by over 100 exchanges globally and is backed 1:1 with USD. The funds located with the Paxos Trust Company are audited and regulated, ensuring the 1:1 backing stays in place. Paxos is also the creator of a gold-backed stablecoin called PAXG.
The Uses of Stablecoins
Stablecoins can be a great way to protect people from volatile currencies. This point can often be overlooked by people who live in places with consistently stable currencies like the U.S. or Europe. Many developing countries in the world don’t have this same stability, and it can often be something that we can take for granted.
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If you’re from countries like Argentina, Venezuela, or Zimbabwe, you’ve seen what hyperinflation can look like first-hand. This might be through prices changing while you’re grocery shopping, to your money holding different amounts of value today versus yesterday. We’ve also seen what economic crises can do to housing markets, businesses, and people’s ability to access their own assets during bank runs.
Stablecoins endeavor to combat these issues and provide a safety net by doing two things particularly well: providing stability and reducing volatility.
Safety & Stability
Stablecoins are intended to provide people with a safe haven. A stablecoin pegged to the US Dollar or gold seeks to provide people in many developing nations with more safety and stability in the value of their assets. Stablecoins can be useful if you want to know that what you earned today hasn’t heavily diminished in value tomorrow, affecting your livelihood and ability to provide for yourself or your family. Stablecoins are designed to provide people with that protection and allow them to feel safe in the knowledge that their store of value is tied to an asset that is more stable than what their country offers them.
Whereas many cryptos can themselves be volatile, stablecoins are made to fit into the use case of digital cash. They can be easily spent, used as a store of value during volatile trading periods, and take advantage of crypto’s ability to move value across borders in an easy, inexpensive way.
Get Started Trading Stablecoins
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These blog posts serve as a general overview of the crypto industry. No content in these blog posts or on the ShapeShift website constitutes purchase or investment advice. Digital assets are experimental, volatile and risky, and we therefore recommend that you seek professional advice from a qualified advisor before making any financial decision.
The information is provided “as is” without warranty of any kind, express or implied, and in no event will ShapeShift be liable for damages of any nature resulting from reliance upon the information. The blog posts may contain links to third-party materials that are not owned or controlled by ShapeShift. ShapeShift does not endorse or assume any responsibility for any such third-party sites, information, materials, products, or services.
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