What To Know Before Investing In Stablecoins
Despite their name, stablecoins are anything but stable. In fact, they've been called the next big thing in cryptocurrency because they have the potential to disrupt everything from payments to lending and beyond.
Before you jump on board this new trend and buy some stablecoins for yourself, there are a few things you need to know about them first. Here's what you should consider before making your first (or second) purchase.
Stablecoins Are Less Volatile
One of the most obvious reasons to buy a stablecoin is that they are less volatile than other cryptocurrencies. This means that you can trade them with less risk of losing money.
The reason for this is that stablecoins are backed by real-world assets, so they’re more likely to maintain their value over time. Also, unlike other cryptocurrencies, which have no inherent value, the price of a stablecoin is directly related to its underlying asset.
For instance, if you own USDC, you have ownership rights over USD at any time in the future. While there may be periods where prices fluctuate considerably between different times and markets (such as when an exchange experience high traffic), it’s important to remember that your money isn’t disappearing into thin air. You just need to wait for things to settle down before selling or withdrawing your funds again!
Stablecoins Can Be Backed by Different Types Of Collateral
There are multiple types of collateral that can back a stablecoin. These include fiat currency, gold and other precious metals, real estate, and commodities like oil.
The benefits of each type of backing vary depending on the asset being used and what a user is looking for in their stablecoin. For example, a user who wants to use their cryptocurrency without going through banks may prefer using an asset-backed coin such as Tether (USDT), whose value is pegged to the dollar because it offers stability from volatility seen in other cryptocurrencies while still offering some liquidity.
Meanwhile, someone more interested in investing in gold might look into DigixDAO, which was created to represent ownership of physical assets with digital tokens backed by gold bars stored in secure vaults around the world.
Stablecoins Still Carry Risks
Despite the advantages of stablecoins, they still carry risks. Due to their centralized nature and the fact that they are backed by real-world assets such as fiat currency, stablecoins can be hacked. The Tether hack in November 2018 is a good example of this: $31 million worth of Tether tokens were stolen from the project's wallet.
While some people think stablecoin projects are more liquid than other cryptocurrencies because they're not being traded on exchanges all day long (which can cause price fluctuations), others believe that since most stablecoins are just IOUs for actual dollars or euros or yen. There's no reason for users to trade them at all, you could just see your local bank teller next time you go shopping instead!
To back their currencies with real-world assets like gold or silver reserves would require high capital reserves in order to maintain stability over time. Even then, it wouldn't guarantee anything because economics always has its own way of working things out eventually--it may just take longer than expected!
Look For A Stablecoin That's Transparent And Audited
Transparency and auditing are important because they prevent fraud. If a stablecoin is backed by an audited reserve, you can be sure that your funds aren't being manipulated by someone who's acting improperly.
Transparency helps protect against price manipulation by making it clear whether the value of a token has been artificially increased or decreased in order to profit from other investors' actions. In this way, transparency also protects you from losing money due to unexpected market movements that may cause instability in your investment.
You Can Earn Interest
If you have stablecoins, you can use them as collateral to borrow money. This means that if you borrow $1,000 from a lender and put $1,000 of stablecoins in your account as collateral, then if you don't pay back the loan on time, the lender will take your stablecoins and sell them in exchange to get their money back.
This is a cool feature because it allows people who want to earn interest on their savings accounts but don't have much interest-bearing debt (like credit cards) or investment opportunities (like stocks). This gives the opportunity to turn their savings into something more lucrative than just sitting in a bank account earning 0% interest per year.
Be careful: this type of borrowing comes with high risk because there's always the chance that someone could default on their loan. When they do default on their loan and the lender tries selling off some of those stablecoins on an exchange only after everyone else has sold off theirs first!
Before you buy stablecoins, you should learn about their benefits, risks, and vulnerabilities. While the technology is still in its early days, it has the potential to become a game changer in the world of cryptocurrency. If you want to make sure that your investment is safe and secure, then you must do your research before making any decisions.