In the cryptocurrency world, things change so quickly. Just as people were getting to understand what crypto is and how to go about it, Stablecoins were brought forth. And since then, Stablecoins have garnered so much attention as a key part of the crypto ecosystem. Crypto experts have suggested that Stablecoins are the savior of crypto’s market volatility as they provide stability in the market. This article details how Stablecoins provide stability in the crypto market.
What Are Stablecoins?
To understand how Stablecoins stabilize the crypto market, it’s not important to first understand what they are. Stablecoins are a type of cryptocurrency (decentralized currency) whose price or value is pegged on “stable” assets such as the U.S. dollar, gold, and the Euro. Stablecoins aim to provide an alternative to cryptocurrencies (like Bitcoin) in the market and stabilize the ever-volatile crypto market.
How Do Stablecoins Provide Stability in the Crypto Market?
There are many ways Stablecoins provide stability in the crypto market. Here are some:
Stablecoins facilitate cryptocurrency trades on crypto exchanges through the stable prices pegged on an asset. When trading cryptocurrencies, traders can use Stablecoins as their trading pairs. Generally, this helps the trades maintain the value of their assets, with a more practical (and possibly accurate) correlation of the crypto’s value.
This also allows crypto market participants/investors to avoid inefficiencies coming from converting cryptos to fiat currency (trade Solana on Kraken) for crypto trades. Stablecoins maintain reserve assets (of individuals or governments) as collateral or via algorithmic formulas to control supply.
Store of value
Stablecoins serve as both a store of value and a means of payment for crypto-related transactions. Compared to traditional cryptos, which are highly volatile, Stablecoin has a consistent value based on the asset they are tied to. This is how Stablecoin holders store the value of their crypto.
To be used as a medium of exchange, any currency not considered a legal tender must remain stable. This assures those who accept or use it that it will retain its purchasing power in the short-term. It’s rare to see even 10% in daily moves in traditional fiat currencies. Stablecoins help stabilize crypto markets and assure traders that they can maintain value even in the short term.
Assets for crypto loans
Stablecoins also serve as assets for crypto loans. Many users can set Stablecoins as their guarantee for crypto loans based on the asset value they’re tied to. Stablecoins provide a stable currency value by pegging its value to a real-world asset (called a reference asset). An example of such an asset is the U.S. dollar. This allows other players to accept them as guarantees for crypto loans that are to be paid in the future. This has a stabilization effect on the market.
Transfer money at low costs
With Stablecoins, users don’t have to pay extra transfer fees for sending money across borders. Stablecoins operate on low-fee crypto chains, which keeps the price of transactions lower and stabilizes the market.
Stablecoins are also used to earn interest as much as it is used as an asset for crypto loans. By lending out Stablecoins, in some countries, users can earn some interest for the loans. This helps all players have some equality in the market.
Crypto investing is highly risky, unstable and usually speculative. Stablecoins help to stabilize the crypto market and reduce the risk of crypto transactions. They enable users to store the value of their cryptos almost in the same way or even better than fiat currencies.