If there is one particular shortcoming that many within the crypto space – even the staunchest supporters – can agree on it is that a lack of stability plagues cryptocurrencies like Bitcoin.
The fluctuations in price and overall volatility have been a thorn in digital currency’s side for a long time. It is also the main reason why they have not reached the mainstream yet. Detractors frequently point to the unstable nature of Bitcoin, Ethereum, and other cryptocurrencies to convince the masses to steer clear of trading and investing in them.
However, since the start of 2021, investors are looking at a new and effective solution to these fluctuations: stablecoins.
Stablecoins are a unique form of digital currency. Their value is primarily tied (or pegged, as it is commonly referred to in the crypto space) to real-world currency prices. Similarly, its value can be pegged to precious metals, as is the case with PlatinumCoin.
Stablecoins are making a splash in the world of crypto and have recently garnered lots of attention in the financial industry. However, before investing in them, one must understand what stablecoins entail, as well as what the pros and cons of investing in them are.
When it comes to making a physical purchase of silver or gold, investors have to go through various obstacles and jump through hoops. Buyers are expected to corroborate their identity, income, and other important information.
Furthermore, they must find the right vendor to buy from and will typically pay a premium. Afterward, they need to bide their time until the assets can be shipped, or they can retrieve them. Finally, they need to put those assets into storage, sometimes in a safe they buy themselves, or they pay a company to secure the assets.
Put simply, investing in physical assets tends to be quite maddening. However, with stablecoins, investors can immediately purchase fractional amounts of an asset.
No identity reveal is necessary, plus the coins are kept inside a free digital wallet. This secrecy is attractive in the eyes of most investors, particularly those showing an interest in crypto.
Moreover, being able to buy fractional amounts is meaningful for investors who have fewer funds. Users can start earlier than they normally would, putting in as much (or as little) as they would like.
The most prominent advantages include the following:
- A stablecoin’s is that its value remains stable, even after several years.
- Stablecoin usage is more convenient in comparison to other incredibly risky digital currencies. Transparency is provided by stablecoins that receive backing from regular audits
Through stablecoins, exchange decentralization can be increased. Bitcoin’s price volatility is what is keeping new investors from making any investments in their currency. For them, a stablecoin seems like a good option to invest in.
With all of that said, those who want to profit from crypto may not find stablecoins ideal. These coins are tied to the value of a physical asset. Thus the coin’s price only changes when its physical counterpart does.
For example, Tether stablecoin investors must remember that it is designed to maintain $1.00 per coin, give or take a few cents. Evidently, one cannot generate a profit from this.
Instead, it is meant primarily for users to convert funds to another fiat type. Alternatively, move them worldwide in a way that is faster and more economical than customary conversions.
Certain stablecoins can generate a profit, but this is not their assigned purpose. While fiat-backed stablecoins are seen as the steadiest of the bunch, their stability is not profitable for a long-term investment strategy. Consequently, the value of fiat-backed stablecoins could decrease over time.
The most common drawbacks of investing in stablecoins include the following:
- Stablecoins are decentralized, meaning that they can be stolen from your bank account. Furthermore, the owners retain confidentiality due to the decentralized nature of the collateral system. From this, there have been some trust issues with stablecoins.
- In contrast to cryptocurrencies, there are no foreseeable gains after investing in stablecoins.
- In the case of secured assets, the stablecoins’ cost will vary. This means that there are higher chances of bankruptcy for the project.
Should You Invest?
According to various experts, even with their shortcomings, there is no harm in engaging with stablecoins and investing in them.
In fact, some investors have successfully diversified their crypto portfolios by including some stablecoins in the lineup. The choice to move forward after learning about the pros and cons is ultimately up to the investor.
Overall, stablecoins are considered to be a very safe long-term investment. However, one must remember the advantages and disadvantages and not recklessly jump onboard.
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Author: John Brooks