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Should You Invest In Stablecoins? Are They Really Stable?

Is it safe to invest in stablecoins for better yields on your crypto portfolio?

are stablecoins safe
Dmitry Demidko, Unsplash

Is investing in stablecoins a good way to grow your crypto portfolio?

Although stablecoins have been around for many years, it has never been a bone of contention within the crypto community and regulators before.

So, let’s understand what are stablecoins and why is it much talked about these days.

What Are Stablecoins?

As we know, cryptocurrencies are volatile, and their price tends to fluctuate on a real-time basis. For example, the value of the first cryptocurrency Bitcoin has been historically volatile and has witnessed extreme swings.

But stablecoins share many powers of other cryptos minus the volatility. Stablecoins are pegged to a range of assets from fiat to gold or another cryptocurrency.

Also read: Staking vs Yield Farming: What’s the best way to earn passive income from cryptocurrencies?

Stablecoins were created to overcome the price volatility of cryptocurrencies like Bitcoin, Ethereum. As there is no mechanism to determine the real-world value of these cryptocurrencies, safe investors tend to embrace secure options like stablecoins.

At the time of writing this blog, the market capitalization of the top stablecoin token surpassed $118,190,652,908 on CoinMarketCap, with Tether (USDT) leading the list, followed by USD Coin, Binance USD, DAI, and Terra USD in the top five.

Types Of Stablecoin

We can categorize stablecoins into three categories depending on the collateral they are backed by:

1. Fiat-based Currencies

These stablecoins are pegged to the price of US dollar. Tether (USDT), Gemini Dollar (GUSD), and USD Coin (USDC) are few examples.

2. Commodity Collateralized Currencies

These stablecoins are based on commodities like gold, silver, oil, real estate, etc. These coins will appreciate in value in parallel to the increase in value of the underlying asset. Popular examples include PAX Gold (PAXG) and Digix Gold (DGX).

3. Crypto-backed Currencies:

These currencies are pegged to other cryptocurrencies as collateral. As the value of cryptos is not stable, they use smart contracts to balance on volatility. The most popular crypto collateralized currencies include Dai (DAI) and Havven (HAV).

Earning Income Through Stablecoins

In the crypto market, currency owners often covert their profits into stablecoins and use it as a reserve to invest in other cryptocurrencies when the market is right. This saves them the hassle of turning profits into fiat money and transferring it to a bank account and retransferring it for making investments.

Stablecoins can be used to invest in cryptocurrency exchanges or Decentralized Finance (DeFi) platforms to earn interest. Investors can convert their USD into stablecoins to earn income through staking and yield farming. Platforms like Crypto.com offer up to 14% p.a for staking stablecoins, Celsius Network largely offers around 8.88% APY rate for a variety of stablecoins like TUSD, GUSD, PAX, USDC, MCDAI, ZUSD, etc.

Also read: Why Are More Countries Adopting Bitcoin As Legal Tender?

Is Tether Risky? DYOR Before Investing In Stablecoins

Investing in Tether is not the same as holding a US dollar. While its price is pegged to the dollar, the company might not have enough US dollars if many people tried to redeem their tokens together.

While Tether originally claimed that each USDT is backed by a US dollar in its reserve, it is far from true. Their reserve is a mix of cash, secured loans, corporate bonds, and other investments. Additionally, Tether’s reserves have not been independently audited.

Tether has come under fire for backing only 74% of its currency by reserves. Before investing in a stablecoin, make sure it is audited by independent accounting firms like Gemini Dollar, which is audited regularly to confirm the cash it keeps in reserve.

The Tightening Regulations

As the market capitalization of stablecoins grew, it drew more attention from the US and other regulators.

US Fed Chairman Jerome Powell stressed on the need for a digital US currency at a congressional hearing in July.

“You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies if you had a digital US currency,” he had said.

But why is the Fed worried over the rise of stablecoins? Primarily, it is the loosening monetary control that scares them. With Facebook planning to launch its own stablecoin later this year, “it would make it more difficult for the Fed to control the money supply or more generally, to conduct monetary policy,” according to Rutgers University economist Michael Bordo told CNBC.

The bottom line is, whether you like it or not, stablecoins aren’t going anywhere anytime soon. With stablecoins aiding cross-border payments, perhaps a global regulatory framework is the need of the hour.

Have you invested in a stablecoin? Share with us with a comment below.

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