Crypto & Us : Bite 15 (Stablecoins)
Cryptocurrencies are known for their volatility. It is not surprising to see currencies fluctuating either way to the tune of 20–30% or more overnight. For the people who do not have this level of risk appetite but still want to get a slight exposure to the cryptocurrencies, just to explore how they function, we have a few relatively less risky tokens, also known as ‘Stablecoins’.
- In simple terms, Stablecoins can be defined as cryptocurrencies that have no volatility. They were created in an attempt to offer the best of both worlds; the stability of a traditional currency and the privacy and efficiency offered by cryptocurrencies. There are hundreds of stablecoins in the market but around 40 are being extensively used and have real use cases.
- The value of stablecoins is generally pegged to a reserve asset, most commonly the US dollar. The most popular stablecoin currently is Tether (USDT) with a market cap of approximately $62 Billion. It can be used to purchase other cryptocurrencies and do other transactions of different blockchains. The fact that it’s value does not fluctuate makes it a more preferable medium of exchange.
- The most common use case of stablecoins is for Global payments. You can transact with the stablecoins across the globes at any day and at any time thereby making remittances via banks redundant. You save on spending extra bank fees and wire transfer charges and eliminate the time constraints. Apart from that it reaches the corners of the world where the people are still unbanked by giving them the facilities provide by traditional banks at the palm of their hands with the least charges.
- If this still doesn't sound interesting, guess what? You can earn around 7.5% interest just by holding your USDT on platforms like BlockFi. So even if you do not have the stomach to handle volatility, you still can earn money just by converting your government backed currencies to a stablecoin. In India, the average ROI if you have your money in the savings account hovers between 4 to 5% and in the US and Europe, it’s around 0.1%. Mind blowing, right?
- Stablecoins are even more threatening to the governments than the other cryptocurrencies because they eliminate that one major element that restricts people from entering the market, i.e the volatility. With that taken care of, they become even more enticing for the retail investors. In the most recent news, US Treasury Secretary Janet Yellen has decided to conduct a meeting with the officials at the White House to discuss how the stablecoins can be regulated and assess the threat they possess to the financial markets.
Payments in bitcoin and ethereum are great, but the volatility makes them more of a store of value than a stable medium of exchange. This is where the stablecoins come in and have a higher probability to set the pace for mainstream adoption. You can use your stablecoins exactly like you use your traditional currencies and still get more out of them without paying extra charges. So when are you making the switch?