Written by Logan

On October 22, 2020

Stablecoins Explained

Most people who invest in cryptocurrency want to have a way to move money from one coin to the next, or to pull their investment out of a coin and place it somewhere safe. Converting from cash to crypto and back multiple times can cost you quite a bit in fees – so what’s the solution? Welcome to the world of stablecoins.

Stablecoins are one of the most important parts of the cryptocurrency industry and an area destined to see major adoption in the coming years. In this article, we’ll outline why stablecoins are important and what it means for you.

Stablecoins – Bringing Stability to an Unstable Market

Ask anyone who has been involved in cryptocurrency and they’ll tell you: this market is unstable and fluctuates constantly. That’s a feature, not a bug; one of the most loved things about cryptocurrency is the fast price action you can see on a particular coin. Bitcoin could be worth $10,500 today, and $12,500 tomorrow – wider price changes can happen even quicker, as has been the case with many altcoins in the past year.

Stablecoins are inherently different. A stablecoin has its price pegged to some other form of value; most coins are pegged to the US Dollar at a 1:1 ratio, but some coins are pegged to other assets, as is the case for Paxos Gold (PAXG). The benefit to a stablecoin is that it gives you a place to move your holdings that you can be confident will not change in value, no matter what. To understand how that works, let’s use an example.

The First-Time Investor

Let’s say you buy $250 worth of Bitcoin – all that you can afford right now. You enjoy watching its price change as the market grows; one day your holding is worth $265, the next day it’s worth $240. However, let’s say one day the price explodes upwards and what you own is now worth $400! You’re over the moon with this and want to lock in your profits. So what do you do?

If you sell your Bitcoin holdings you’ll have earned that money. However, most places charge you fees to convert to fiat money; plus, if you want to move that money back into Bitcoin, you’ll probably have to pay a fee again. Maybe you just want to pull out now, watch what the price does, and buy back in later – is converting to fiat the best way to do this? Not necessarily, which is where stablecoins come in.

By converting your Bitcoin to a stablecoin, you can rest assured that your money will retain its value, while having more options available to you. Now you have $400 worth of a stablecoin; you can keep it there, convert it to fiat, or convert it to a different cryptocurrency. Stablecoins provide you with a safe harbor to park your earnings, consider your options, and decide your next move – no pressure, no ticking clock.

The Institutional Investor

While stablecoins are an obvious win for the average investor, they’re even more attractive for institutional investors. People, companies, and firms looking to buy and sell large amounts of cryptocurrency need to have guaranteed and safe fall-back options for when prices fluctuate in the wrong direction. Stablecoins offer what is needed for these investors to feel confident moving into crypto.

As we’ve seen recently with large institutions buying eye-popping amounts of cryptocurrency, these investors are looking seriously at the world of crypto. Fully functioning stablecoins only serve to sweeten the deal even more and provide more ways to enter and exit the cryptocurrency market.

How can I trust a stablecoin?

You might be wondering: How can I be sure that a stablecoin will always maintain its value? That’s a good question, and is something that a lot of people ask when looking at this important part of crypto. Here’s a quick rundown on how each coin maintains its value.

USDT – Tether (USDT) has the largest market capitalization of all stablecoins. The team behind USDT holds a certain amount of fiat currencies, such as US Dollars, Japanese Yen, and Euros, in secure bank accounts to maintain the value of each USDT. One of the oldest stablecoins in the industry, the Tether team is also broadening into stablecoins for other currencies.

USDC – Every USDC is backed 1:1 by a US Dollar that is held in reserve by a group known as CENTRE. The CENTRE consortium is comprised of the payments company Circle, the cryptocurrency exchange Coinbase, and the Bitcoin mining company Bitmain. An audit is performed every month by an independent financial institution to ensure that the value of the assets held in reserve match the total value of all USDC.

PAX – Paxos Standard (PAX) is backed by the Paxos team, which holds an equivalent amount of US Dollars in reserve in an account that is audited every month. Paxos is a company focused on building financial infrastructure, often focused in the areas of payments processing and asset movement.

TUSD – The value of TrueUSD is pegged 1:1 to the U.S. dollar, acting as a stable currency for digital exchange. TrueUSD (TUSD) is the first independently-verified digital asset fully collateralized by US Dollars. TUSD is backed by TrustToken, an experienced company that offers stablecoins for other currencies as well, including TrueGBP and TrueHKD. The ERC20 stablecoin uses multiple escrow accounts to reduce counterparty risk, provide transparent attestations, and offer legal protections against fraud.

BUSD – Crypto exchange Binance partnered with Paxos to create BUSD, a stablecoin backed by a 1:1 reserve of US Dollars. Operating on Binance chain and Ethereum, BUSD transfers can move exponentially faster on its native chain over Ethereum. Binance is one of the largest cryptocurrency exchanges in the world and BUSD enjoys widespread use in and around that platform.

PAXG – Paxos Gold (PAXG) is backed by the same team as PAX, with every PAXG coin representing one fine troy ounce of gold – allocated with a specific serial number that is attached to a specific gold bar held in a protected vault. Using security provided by Brinks, Paxos guarantees the safekeeping of every ounce of physical gold included in the PAXG network.

As you can see, stablecoins have the institutional backing, paired with real-world assets, to make them a uniquely stable part of the cryptocurrency ecosystem.

Easier Movement Between Exchanges

Another benefit of stablecoins is the increased ability to move holdings between exchanges. With stablecoins, you can move money from one exchange to another if you see an opportunity you’d like to chase somewhere else. For example, let’s say you see a new altcoin being offered on a competing exchange, but it isn’t available on Metal Pay. By moving some of a stablecoin over to that exchange, you can chase that opportunity, and then come on home to Metal Pay when you’re ready to store your money with a team you can trust – one that has FDIC-insured Cash wallets and one of the most regulatory-compliant Marketplaces in the industry.

Stablecoins and Metal Pay

We’re laser-focused on making cryptocurrency the easiest way to move money, investment money, and use money. Part of that effort involves creating a better on-ramp; there should be as few barriers to entry as possible, so nothing can stop you from starting in crypto. That’s why we’ve made sign-ups quick, fees low, and our Support Team ready to help you.

The next step is to make cryptocurrency more accessible to the average investor, which is why we’ve offered more stablecoins than ever before on Metal Pay. We’ve added support for USDT, USDC, and PAX, in addition to our existing stablecoins like TUSD, PAXG, and BUSD. We think that increasing the number of stablecoins on Metal Pay ensures our users have more options, more choices, and more freedom.

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We hope that you feel more informed and empowered to make the right decisions to protect your wealth. Stablecoins are an important part of the cryptocurrency ecosystem, so understanding it on a basic-level can give you an edge when it comes to trading and investing. Still have a question about stablecoins, or about Metal Pay in general? Reach out to us on social media: Twitter | Instagram | Facebook.

🤘 Your friends at Metal 🤘

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