What's the Point of a Stablecoin? (A Simple Explanation)

[Fariwala]

Whether you’re brand new or a veteran to the cryptocurrency world, navigating the new technologies that are popping up can be a full-time job. Since the beginning, cryptocurrencies like Bitcoin, Ethereum, and Litecoin have allowed anyone to take an active role in the growth of the cryptocurrency market. However, the massive waves of volatility have pushed a lot of would-be participants away. That’s, of course, until stablecoins came onto the scene.

So, what is the point of a stablecoin? A stablecoin is a cryptocurrency that attempts to peg its value to the value of another asset, including fiat currencies, commodities, and cryptocurrencies. The most popular types of stablecoins track the value of fiat currencies, including US dollars (USD) and Euros (EUR).

With the cryptocurrency market being as volatile and chaotic as it is, stablecoins have certainly tapped into a market of those wanting to take part without enduring wild market swings. By having a cryptocurrency that acts like USD, EUR, or any other relatively safe asset, market participants have a place to breath when market waves start to appear.

Why We Need Stablecoins
Cryptocurrencies are the most well-known application of the innovate blockchain technology. While fiat currencies, like USD or EUR, are backed by the confidence the market has in the issuing governments, stablecoins can be backed by actual assets. By also keeping the value of stablecoins pegged, they offer a level of stability in a shaky market.

Stablecoins provide the same value to cryptocurrency investors, traders, and exchanges as fiat money provides to the participants in the non-cryptocurrency financial markets; stability. While non-cryptocurrency investors will allocate portions of their portfolios to cash, Treasury bonds, or money market funds when volatility is on the rise, cryptocurrency investors move to stablecoins.

There are several reasons cryptocurrency market participants move to stablecoins as opposed to traditional ‘risk-off’ assets. For one, staying in the cryptocurrency market allows them to move faster between trades without having to wait days to transfer to fiat money. It’s also true that not all cryptocurrency exchanges support the use of fiat currencies, leaving stablecoin as the only solution.

Now that stablecoins have provided a way to find safety in the cryptocurrency market, market participation in terms of volume and market capitalization has steadily grown. Due to increased confidence in the cryptocurrency marketplace, more people are choosing to engage in the market.

As stablecoins bring more confidence into the market by allowing participants a ‘safe space,’ more movement, or volume, has occurred. This volume has had a proportional effect on liquidity, making the cryptocurrency market quicker to maneuver as well as making it more efficient. Increased efficiency also brings more accurate asset pricing, resulting in fairer asset prices and tighter bid and ask spreads.

The benefits of stablecoins are immense and have given a massive gift to the entire cryptocurrency market. By providing a ‘risk-off’ instrument, the market has instilled greater confidence, it’s grown, and it’s become more efficient. However, not all stablecoins are created equally, so getting to know the way they work can help you choose one over the other when the time comes.

More info: https://www.grantbartel.com/blog/what-is-the-point-of-a-stablecoin/