What is a stablecoin?
A stablecoin is a class of cryptocurrency that offers price stability by being pegged to a currency like the U.S dollar or to a commodity’s price such as gold. Stablecoins achieve their price stability using collateralization or through a mechanism of buying and selling a target asset.
Why were they created?
Cryptocurrencies can see extreme volatility, Bitcoin rose from around $5000 in March 2020 to almost $65,000 in April 2021 before plunging by over 50% to around $30,000 in June 2021. This is where stablecoins come in as they provide needed stability that provides a way to store your monetary value without seeing fluctuations.
Types of stablecoins?
There are three categories of stablecoins. The fiat-collateralized stablecoins maintain a fiat currency reserve, like the U.S dollar. Tether (USDT) and TrueUSD (TUSD) are popular crypto coins that have a value equivalent to that of a single U.S. dollar. Crypto-collateralized stablecoins are backed by other cryptocurrencies such as MakerDAO's DAI is pegged against the U.S. dollar and allows for using a basket of crypto assets as a reserve. Lastly, we have non-collateralized stablecoins that don’t use a reserve but an algorithm mechanism to increase or decrease the supply of tokens similarly to a central bank.
Why should you care?
Stablecoins are a helpful way to protect your gains during down trending markets. For instance, at Moonbit, when our signals show a high risk or negative-trending market, we allocate a larger percentage of your assets to stablecoins to protect you. Keep in mind, stablecoins continues to come under scrutiny by regulators and not all stablecoins are created equally.