We’ve all heard of Bitcoin – but the cryptocurrency world doesn’t end there. In fact, there are 5,000 different cryptocurrencies in circulation around the world!
These cryptos vary enormously in terms of trading volume, country of origin, and usage. Over the last decade, we’ve also seen a growing number of cryptocurrencies known as stablecoins. If you’ve come across the term ‘stablecoins’ online, you may well have felt confused. After all, cryptocurrencies are infamous for their volatility – there’s almost nothing stable about them.
So what exactly are stablecoins? If you’d like to learn more about this particular form of cryptocurrency, read on. In this beginner’s guide, we’ll explain what stablecoins are, how they work, and why some of the top 10 stablecoins in 2020 have proved so popular.
What Are Stablecoins?
Stablecoins are a type of cryptocurrency which was developed to bypass the issue of volatility. They are referred to as ‘stable’ because they are tied in value to a commodity or fiat currency – that is, a currency whose value is regulated by governments, such as the British pound, the Euro, or the US dollar.
The idea behind this is that the value of stablecoins won’t be able to fluctuate. More ‘traditional’ cryptocurrencies such as Bitcoin can increase – or, as is more common, decrease – in value wildly in very short periods of time. In November 2018, for example, the price of Bitcoin crashed by a staggering 41% in the space of just two weeks. The value of stablecoins, however, can never vary more than that of its fiat currency.
Why Are Stablecoins So Popular?
We’ve already mentioned the principal benefit of stablecoins – that they can remain stable. Often viewed as the sweet spot between fiat currency and crypto, stablecoins offer traders the best of both worlds: the versatility and decentralisation of cryptocurrency, with the stability and respect of fiat currencies.
It’s worth remembering that not all stablecoins are tied to fiat currencies. Some are tied to commodities such as precious metals or oil, as these assets are also generally stable in price.
Stablecoins Are ‘The Digital Dollar’
Many cryptocurrencies prefer to trade in stablecoins because it’s often easier to exchange these assets into fiat currencies – at least in theory. On cryptocurrency exchanges, stablecoins such as Tether are often straightforwardly viewed as the virtual equivalent of their underlying asset. In the case of Tether (USDT), this is the dollar – hence its nickname, ‘the digital dollar’.
Are Stablecoins Too Good To Be True?
The excitement of crypto with the stability of fiat. With tantalising promises such as this, it’s no surprise that many people – including cryptocurrency traders – are suspicious of stablecoins. So, does this currency actually live up to its name?
In terms of market capitalisation, Tether is the largest stablecoin in the world – and the fourth largest cryptocurrency. By trading volume, it’s actually the most widely used crypto, with a current 24-hour trading volume of more than $3,500,000,000.
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But despite its staggering popularity, Tether is no stranger to scandal and criticism. Its owners, the Hong-Kong based company Tether Holdings Ltd, may have promised that 1 USDT would always be equal to $1 (with an additional reserve of $1 for every Tether token issued), but this has recently been proven untrue.
Ever since its launch in 2014, periodically huge increases in the number of Tether tokens in circulation have sparked concerns that Tether Holdings Ltd doesn’t have the financial reserves to back this, dollar by dollar.
And in 2019, it was conclusively revealed that these concerns were valid. Only 74% of Tether is actively backed by the US dollar, throwing its status as a supposed stablecoin into question.
Is Tether Still Considered A Stablecoin?
Yes – but this reputation would be shattered instantly if every Tether trader suddenly decided to exchange their virtual assets to fiat dollars. According to Tether Holdings Ltd, traders can exchange 1 USDT for $1, meaning they can theoretically convert the contents of their online wallets into ‘real’ money. But with the current reserves, this would only be possible for 74% of traders.
On exchange platforms, Tether is still viewed as ‘the digital dollar’. Its controversy has clearly not harmed its success. In fact, it’s sparked a host of new stablecoins, such as Gemini, USD Coin, and even one built on the existing Ethereum blockchain.
We hope this beginner’s guide to stablecoins has helped explain why this form of cryptocurrency remains so popular – and yet so controversial.