Stablecoins: Are They a Safe Investment?

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If you're looking for cryptocurrencies without the crazy price fluctuations, stablecoins are what you need.

Cryptocurrencies are known for their volatility, but there is one type of cryptocurrency that's different. Stablecoins are cryptocurrencies with more stable prices. They accomplish this by tying their value to another asset, such as the U.S. dollar.

Without that volatility, stablecoins don't offer the same potential for huge returns. They do, however, have advantages over more volatile coins that could make them worth buying in certain circumstances.

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What are stablecoins?

Stablecoins are a type of cryptocurrency. Each stablecoin ties its value to that of a more stable asset. The most common asset used is fiat money, meaning a government-issued currency. Other assets, such as precious metals, can also be used.

Unlike other cryptocurrencies, most stablecoins have central authorities managing them. The central authority typically purchases the asset tied to the stablecoin and puts it in a reserve. For example, if a stablecoin is tied to the U.S. dollar, then the central authority could put $10 million in a bank to back $10 million worth of the stablecoin.

Examples of stablecoins

Here are the biggest stablecoins by market cap, all of which are tied to the U.S. dollar:

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• Tether (USDT)
• USD Coin (USDC)
• Binance USD (BUSD)
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Uses for stablecoins

Because of their stable prices, stablecoins are useful in ways that other coins aren't. Most notably, they're the one type of crypto that could catch on as an actual currency.

Although cryptocurrencies can be used for real-world transactions, their volatility is an obstacle. Businesses are reluctant to take payments in an asset that could crash with one tweet from Elon Musk. Meanwhile, customers often don't want to part with something that could increase in value. Stablecoins solve both issues.

There are also several other uses for stablecoins:

• Stablecoins are an easy way to move funds between cryptocurrency exchanges.
• Citizens of countries with unstable currencies can buy stablecoins instead of a currency that could plummet in value.
• People who want to transfer money through crypto can use stablecoins instead of more volatile coins.
• Some exchanges allow you to lend your stablecoins to earn interest on them. During bull markets, you can generally get much higher interest rates for stablecoins. There have been crypto owners earning 25% interest lending stablecoins this way.

Risks of stablecoins

For the most part, stablecoins are much safer than other cryptocurrencies. You normally don't need to worry about the price plummeting. Still, there are a few risks to know about.

The first is the natural consequence of stable prices. The price of a stablecoin may not drop, but it also won't increase. By putting money in stablecoins, you're giving up the potential offered by those high-risk, high-reward coins. If you had put $1,000 in Bitcoin five years ago, you'd be sitting on over $70,000 now. If you had put $1,000 in Tether five years ago, you'd have about $1,000.

It's also worth noting that a stablecoin's value depends on the asset it's pegged to. They can still increase or decrease in value based on what happens to that asset. If you buy a stablecoin pegged to the dollar, you're banking on the value of the dollar.

One final risk is whether the central authority has the collateral it claims. If it doesn't, then it may be unable to meet its financial obligations. Many of the central authorities for stablecoins aren't open about their reserves. Tether is a prominent example: The company behind it previously lied and claimed that every Tether was backed by $1. During an investigation by the New York Attorney General, it had to admit that this was never true.

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Should you buy stablecoins?

Consider buying stablecoins for crypto transfers or if you want to lend crypto. Outside of those situations, stablecoins probably aren't a necessity.

The main reason to buy and hold stablecoins would be to lend them at high interest rates. Stablecoins also work well when you need to transfer crypto to someone else or to another exchange. By using stablecoins, the value shouldn't change as your transfer gets from point A to point B.

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