On Crypto Price Swings: Stablecoins

Mar 7, 2022
a picture of stablecoins protecting against volatility

Cryptocurrencies are known for their high volatility. This often scares away many potential investors. While there are many opportunities in these volatile crypto price swings, some traders may wish to minimize their risk altogether. That’s where stablecoins come in. Stablecoins offer a valuable solution to this problem. They are cryptocurrencies that are pegged to stable assets such as the dollar. This means that they are less prone to large price swings. Additionally, because stablecoins are backed by real-world assets, they can be used as a hedge against crypto market volatility. Lastly, stay with us until the end of the article to see how to use stablecoins for passive income. 

What are stablecoins used for?

In the words of Fabio Panetta, Member of the Executive Board of the European Central Bank (ECB), stablecoins

“are digital units of value designed to minimize fluctuations in their price against a reference currency or basket of currencies.”

The first stablecoin was introduced in 2014 by Bitshares. Called BitUSD, it was pegged to the US dollar and backed by collateral stored in a centralized account. However, this system proved to be vulnerable to attack and was eventually shut down. Now, there are a variety of stablecoins available on the market. Each has its unique features. Some of the most popular stablecoins include Tether (USDT), Gemini Dollar (GUSD), and USD Coin (USDC).

There are a variety of reasons why people might want to use stablecoins. They offer several benefits for investors. Firstly, they provide a more stable investment option than traditional cryptocurrencies. Secondly, they can be used as a hedge against crypto market volatility. Furthermore, they are regulated and backed by real-world assets, making them more trustworthy. Some of the most commonly discussed benefits for stablecoins include:

- Hedging against crypto price swings: Using stablecoins as a hedge against crypto price swings can protect your investment portfolio. However, it means that you won't have them invested in a traditional cryptocurrency. Should the market take an upswing, these stablecoins would not be exposed to the upside of the market. It means that potential profits would be lost. 

- Speculation: Many people are still new to the crypto space but would still want to put their foot in. Stablecoins offer them this opportunity. Needing to learn what exactly they should invest in, they would still be exposed to the crypto market. Furthermore, they can earn interest for holding them in savings accounts, as is discussed later on in the article. 

- Trading flexibility: Stablecoins usually make it easier to trade any type of cryptocurrency. Usually, it is the go-to asset to buy or sell cryptocurrencies. The latter is true when taking and utilizing profit. Furthermore, stablecoins allow you to gauge the values you are transacting in a way that is easier to discern.

- Everyday transactions: Since cryptocurrencies are volatile, stablecoins offer a solution to value for value transactions. Imagine one wants to buy a pair of sneakers for $100. Stablecoins are a more viable option to pay with. Paying with currencies such as BNB would differ in the amount given the volatility. Therefore, stablecoins make more sense for buying consumer goods.  

- More calculable value: This brings us to the final point. Stablecoins make it easier to cement the value of one’s portfolio. Since the value of traditional currencies are not as volatile as cryptocurrencies are, it is easier to discern your portfolio value with them. If one has $10,000 in Bitcoin, it can fluctuate from one day to the next. With stablecoins, you won’t see much of a difference in terms of valuation. In other words, they hold a rather stable valuation over some time.

Overall, stablecoins offer a variety of benefits that make them well worth considering. Due to their stability and liquidity, they can be valuable additions to any crypto investor’s portfolio. Additionally, because they offer protection against crypto price swings, they can be used as a hedge against volatility. For these reasons, stablecoins are a must-have for any crypto investor.

List of stablecoins: Top stablecoins to buy

As noted, there are a variety of stablecoins to buy. Although equipped with the same goal of more stability, each has different features. Let us take a look at some of the most popular stablecoins: USDT, GUSD, USDC, EURS, and PAXG.

- Tether (USDT): This is the most popular stablecoin on the market. It is pegged to the US dollar and is backed by real-world assets. In 2015, Tether (USDT) was introduced. Unlike BitUSD, Tether is a decentralized stablecoin that is pegged to the US dollar. Tether is backed by reserves of real-world currency. Its creators claim that each USDT is backed by one dollar. USDT’s current market cap hovers around the $80 billion mark.

- USD Coin (USDC): In 2019, USD Coin (USDC) was introduced. This stablecoin is pegged to the US dollar. USDC publishes attestation reports every month by Grant Thornton on the reserve balances backing USDC. It currently holds a market cap of around $54 billion.

- EURS stablecoin (EURS): In 2019, EURS was introduced. It is the largest Euro-pegged stablecoin. EURS is regulated and backed by reserves of real-world currency held by the EURS Foundation by STASIS. The company aims to combine “the vast potential of the cryptocurrency market with the stability and reliability of traditional currencies.” The token is supported by an ecosystem of liquidity providers, custodians, exchanges, payment platforms, and others. Its current market cap stands at around $130 million

- PAX Gold (PAXG): PAXG is slightly different from other stablecoins. This stablecoin is pegged gold. More specifically, it is pegged to one troy ounce of a 400-ounce London Gold Delivery gold bar. It is regulated by Paxos, a New York-based crypto company. PAXG holders own the underlying asset, which is kept by Paxos Trust Co. and may be redeemed at any time. The stablecoin has a market cap of around $540 million. 

- Gemini Dollar (GUSD): In 2018, Gemini Dollar (GUSD) was introduced. This stablecoin is pegged to the US dollar. It is regulated by the New York State Department of Financial Services (NYSDFS). It is also backed by reserves of real-world currency held by the Gemini Trust Company. BPM LLP, a registered accounting firm, audits the GUSD reserve monthly. Its current market cap stands at around $216 million. 

Stablecoins as a hedge token for crypto price swings

As we all know, crypto prices can be incredibly volatile. This can cause anxiety for investors. However, by using stablecoins as a hedge, you can minimize your exposure to volatility while also having some “liquid cash” on hand to buy any potential large tips. This also means protecting yourself against potential losses. Stablecoins are becoming an increasingly important part of the cryptocurrency landscape. If you are looking for a more stable investment option, then stablecoins are worth considering. Thanks to their stability and liquidity, they can be a valuable part of everyone’s portfolio. For these reasons, stablecoins are a must-have for any crypto investor.

As noted before, holding stablecoins instead of other types of cryptocurrencies might mean you lose out on a market upswing. However, there are ways around this. For example, you can earn relatively high interest for holding stablecoins in a savings account. YouHodler offers a very high-interest rate of up to 12.3% when holding Tether (USDT) in your savings account.

You can also earn 12% on USDC, 12% on EURS, and 8.2% on PAXG on the platform. When compared to interest rates provided by your average bank, this is much higher. They are paid in weekly payments and your earnings are easily monitored. The app has several features allowing you to earn very high-interest rates on such stablecoins. So for those that want to participate in the crypto market, but don’t have the stomach for the extreme volatility, perhaps try a stablecoin savings account today and get the best of high returns and price stability.

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