Stablecoins! As you cruise across the streets of crypto, you might have come across the term stablecoins. Here is what you need to know about stablecoins and why they are helpful.
As the name goes, stable coins are stable versions of cryptocurrencies that are not subjected to price volatility of digital currencies. To achieve this, stablecoins are pegged to existing financial instruments. Some are backed to the dollar, gold or even other stable cryptocurrencies. This normally categories them to:
Fiat Based: Fiat based stablecoins are pegged to fiat currencies on a 1:1 ratio. A good example is USDT. On USDT, for every USDT that is minted by the company Bitfinex, the equivalent in USD is held in the reserves.
Algorithm based: a computational algorithm controls Algorithm based stable coins whereby some employ arbitrage to ensure that the price of each stable coin remains at a constant level. Some of the algorithm based cryptocurrencies out there are DAI and RSR.
Commodity based: These are stable coins that are backed by commodities such as gold and silver.
Why are they important
As we all know, the value of cryptocurrencies against fiat currencies is quite volatile. Stablecoins help crypto traders and investors to protect their money. Sudden price drops that could affect their portfolios. Stablecoins are also suitable tools for remittances as they are quick to settle, volatility risk free and incur low costs.
Which stablecoin do you protect your portfolio from volatility with?
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