What are Stablecoins? How to trade with Stablecoins?
Stablecoins are a very important part of the cryptocurrency world. Their price stability allows investors to find a safe haven in an extremely volatile market. Whether they are used for trading, storing value, or as a cross-border payment tool, stablecoins offer lower risk. Today, we're going to take a closer look at how stablecoins work and how you can trade with them to help you operate more flexibly in the world of cryptocurrency.
What is a stablecoin?
Stablecoin is a digital currency that is linked to fiat currencies (e.g., the U.S. dollar, euro) or other assets (e.g., gold, bitcoin). Unlike more volatile cryptocurrencies such as Bitcoin and Ether, the value of a stablecoin is kept as stable as possible. For example, 1 USDT (Tether) is theoretically always equal to 1 USD, and this stability has made stablecoins the primary medium of exchange on many cryptocurrency trading platforms.
How is the value stability of stabilized coins maintained? There are three broad types of stabilized coins on the market today:
- Stabilized Currency Guaranteed in FrenchThe most representative ones are USDT, USDC, and TUSD.
- Cryptocurrency Guarantee Stabilized Currency: The use of cryptocurrencies as collateral, such as DAI, stabilizes prices by over-collateralizing crypto assets.
- Unsecured Stable Currency: Algorithmic control of supply and demand to maintain value stability, e.g. Ampleforth (AMPL).
Each stablecoin operates in a different way, but the common goal is to keep price fluctuations within a very small range and provide users with a stable store of value.
Advantages and Disadvantages of Stablecoins
Stablecoins offer several distinct advantages to many cryptocurrency users due to their stability:
- Risk Reduction: Since the price of the stablecoin is pegged to the fiat currency, investors can avoid the drastic price fluctuations in the crypto market and convert their funds into a stable asset.
- Convenient cross-border paymentsStabilized currency eliminates the hassle of traditional financial systems and makes cross-border payments easier and cheaper.
- Bridges for encrypted transactions: Stabilizers act as a bridge between cryptocurrencies and fiat currencies, helping traders move in and out of the market quickly and keeping their capital flexible.
Stablecoins are not without their drawbacks. The issuance and reserve management of stablecoins is usually controlled by a centralized institution, which can be risky in terms of trust issues. The value of fiat-guaranteed stablecoins is still subject to changes in the policy of the fiat currency being guaranteed. Finally, cryptocurrency-guaranteed stablecoins may experience value instability due to excessive market volatility.
How to trade with Stablecoin?
One of the biggest advantages of Stablecoins is that they can be used as a medium of exchange, helping traders to quickly convert funds in the market. To trade with stablecoins, you first need to create an account on an exchange and convert funds (e.g., Taiwan dollars) into stablecoins.
Choose the right exchange: Currently, most major exchanges support stablecoin trading, such as Binance, KuCoin, OKX, etc. According to the needs of Taiwan users, OKX provides very convenient fiat currency deposit and stablecoin trading functions, and the transaction fee is relatively low.
Converting Funds to Stable Currency: You can choose to convert fiat currency or other cryptocurrencies (such as Bitcoin) to stable currency. In the case of USDT, for example, a trader can directly exchange 1 Bitcoin or other asset for 1,000 USDT, so that even if the market fluctuates, the asset will not be significantly affected.
Conducting Stablecoin trading: Traders can use stablecoins for trading other cryptocurrencies, such as exchanging stablecoins for Bitcoin, Ether, or using stablecoins for lending, liquidity provisioning, and other activities. Stablecoins are often used as the primary medium for trading pairs, and there is no need to worry about price fluctuations during the trading process.
Storage and preservation: Stablecoins are also an option for many users who choose to keep their funds in the cryptocurrency market, especially in times of market instability, where they can effectively prevent the depreciation of assets.
How to choose a stablecoin?
There are different kinds of stabilized coins in the market, how to choose the right one for yourself? Here are some factors to consider:
Transparency of Guaranteed Assets: When choosing a fiat guaranteed stablecoin, it is important to note whether the guaranteed assets of the stablecoin are fully transparent. For example, USDC is issued by Circle, and its guaranteed assets are audited by a third party every month to ensure that 1 USDC equals 1 USD.
Liquidity and Pairs: Stablecoins with high liquidity are easier to trade, and USDT is one of the most popular stablecoins due to its extremely high number and depth of pairs on most exchanges.
Issuer's reputation and risk management: Learn about the organizations and companies that issue stablecoins and choose those that have good credit and risk management mechanisms. For example, although Tether (USDT) is the largest stablecoin, some investors have chosen other stablecoins due to transparency issues in the past.
Future Outlook for Stabilized Currency
With the gradual development of the cryptocurrency market, the role of stablecoins is becoming more and more important. Not only as a medium for crypto transactions, but also for a wider range of applications that are unfolding. The development of stablecoins is not only limited to the cryptocurrency space, but many countries are also looking into digital currencies (CBDC), which will likely have an impact on the stablecoin market.
Stablecoin has gradually entered more traditional financial fields, and many financial institutions have begun to explore how to use stablecoin for cross-border payments and asset management. In the future, Stablecoin is expected to become a mainstream tool for global payments, especially with the help of blockchain technology and smart contracts, more innovative applications may emerge.
Frequently Asked Questions Q&A
Q1: Is stable money completely risk-free?
Stabilized currencies are not entirely risk-free. In particular, the value of stabilized currencies may fluctuate when the assets backing them are faulty or mismanaged. For example, some Stablecoins have faced imbalances in value due to insufficient collateral assets.
Q2: How do I convert stable money back to fiat money?
Most exchanges allow users to convert stablecoins directly back into fiat currency. For example, exchanges such as OKX and Binance offer a fiat currency withdrawal service that allows users to convert stablecoins to NT or other fiat currencies.
Q3: What is the difference between Stablecoin and other cryptocurrencies?
The main feature of Stablecoin is its stable price, while other cryptocurrencies such as Bitcoin and Ether have more volatile prices. Stablecoins are usually used for day-to-day transactions and asset preservation, while other cryptocurrencies are more commonly used for long-term investments or market transactions.
We hope this article will help you understand more clearly the basic concepts, usage and future potential of stablecoins, and provide you with more guidance on your cryptocurrency trading journey.
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