If the subject of cryptocurrency is not foreign to you, you have probably heard of stablecoins as a type of cryptocurrency. Both stablecoins and other crypto coins can be used for common purposes such as purchasing goods and services; an example of this can be a web hosting cryptocurrency purchase.
But in which scenario to use stablecoin and in which crypto coins? What are the differences between the two? And what are stablecoins exactly?
We answer these questions in this article.
What are stablecoins?
Stablecoins are tied to the value of the specific assets and remain “stable” in their asset-crypto ratio. It means that the value of stablecoins doesn’t fluctuate on its own; it only does so when the value of the asset they are tied to goes up or down.
Stablecoins are designed to maintain steady value – this is their main concept and purpose. This purpose can be fulfilled in different ways. Thus, there are different types of stablecoins such as fiat- and crypto-backed (based on collateralization), and algorithmic.
Fiat-backed stablecoins are tied to traditional currencies like the dollar, and serve as their digital analog. For example, some of the most common stablecoins are Tether (USDT) and USD Coin (USDC), which are based on the US dollar. Fiat-backed stablecoins are commonly used for trading, lending, and borrowing.
Crypto-backed stablecoins, as the name indicates, are based on cryptocurrency. They are quite different from the fiat-backed type because crypto assets tend to fluctuate in value, which opposes the very concept of stablecoins. Therefore, crypto-based stablecoins require additional collateralization or compliance to a specific ratio in other words. If the collateralization ratio is 125% it means that the user needs to deposit $125 to acquire 100 stablecoins.
Algorithmic stablecoins utilize algorithms to maintain their value. This type of stablecoin doesn’t rely on the other assets that much. Algorithmic stablecoins are more tied to the market demand.
Is Bitcoin a stablecoin?
The short answer is no – Bitcoin isn’t a stablecoin.
This is because Bitcoin’s value goes up and down frequently and it doesn’t rely on anything for stabilizing its value. Besides, Bitcoin is decentralized, meaning any authority does not control it; this is tied to the fact that Bitcoin is generated by code within the network. To compare, stablecoins are often generated by companies or organizations.
To extend the answer to the question, Bitcoin is not an altcoin either. The name “altcoin” implies any crypto asset except Bitcoin. In other words, Bitcoin is always referred to as Bitcoin; there’s no confusion there.
Stablecoins and crypto coins: how are they different?
Stablecoins and crypto coins (altcoins and Bitcoin) are quite different in some aspects. Let’s see which ones.
Volatility
The most prominent distinction of stablecoins is the static value at the core of the concept. They are created to maintain value since stablecoins usually have the same price as the asset they are based on. Altcoins and Bitcoin, on the other hand, go up and down in value for many different reasons. Thus, the main difference in the aspect of value is the different degrees of volatility between stablecoins and crypto coins.
Purpose
New crypto often emerges from trying to eliminate the imperfections of the existing coins. Similarly to that, altcoins were created as a way to counter the drawbacks of Bitcoin, and stablecoins were created to lower the volatility of altcoins (for those, who needed it).
And while the new crypto assets that offer new, previously not explored, features and standards are quite exciting, the stablecoins are here to provide stability to individual investments and the market overall.
Application
Due to the predictability and familiarity that stablecoins provide, they are more often used for everyday financial transactions, including personal and work-related transactions. Stablecoins are also easier to integrate as a valid payment option: it’s easier for customers to understand that cryptocurrency can be used as the means for payments when they see that 1 USDT equals $1 (not less). Stablecoins are easier to get acquainted with, and, hence, are more welcoming to those new to cryptocurrency.
Those are the main differences that stablecoins and crypto coins. Other differentiating aspects can be more precise depending on the specific coins compared.
When to invest in stablecoins and crypto coins
There are particular instances best suited for investing in stablecoins, including:
- Minimizing value loss. Stablecoins can help counter the fluctuating prices of altcoins and Bitcoin and be something you can rely on in case certain coins perform badly.
- Money transfers. Stablecoins are great for money transfers, especially international ones. They minimize the need for conversion and give the sender and the receiver a common understanding of the collaboration ground.
- Taking part in stabilizing the market. Stablecoins can fight inflation or shifts in the market. The more stablecoins there are, the more stability the market has.
For crypto coins, the good investment scenarios include the following:
- Introduction to crypto investment. Altcoins are a great option for investment for people new to cryptocurrency. Bitcoin, however, might not be an easy starter for most people.
- Looking for potential gain. Altcoins and Bitcoin have high volatility meaning you can experience significant upward change in the asset’s price, which means you can profit from the price difference.
- Going into trading. Some crypto coins are good to have in your trading portfolio, and some are great for short-term returns.
