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What are Stablecoins and their Types?
Stablecoins are a type of cryptocurrency. But unlike other coins, their value is tied to a stable asset, such as the US dollar or gold. This link stops protecting them from the sudden market fluctuations and price drops. However, before investing in these coins, you must stay up to date with the latest crypto market news. This will give you valuable insights, helping you choose the right coin.
Stablecoins come in the following main types.
1. Fiat-Collateralized Stablecoins
For every fiat-collateral stablecoin in the digital world, there is real money held in a bank. It is simple and easy to get. You can say that one fiat-collateral stable coin equals one US dollar. Many big names like Tether (USDT) and USD Coin (USDC) work this way.
2. Commodity-Backed Stablecoins
Commodity-backed stablecoins are linked to a physical asset like gold or oil. It means that you can own a piece of a gold bar without having to store it. These coins link the old world of real goods to the new world of digital money.
3.Crypto-Collateralized Stablecoins
Crypto-collateralized stablecoins are a bit more complex. They use other cryptocurrencies as a backup. As crypto can be risky, these stablecoins are often over-collateralized. This means they hold more value in crypto than the stablecoins they issue. Crypto-collateralized stablecoins offer a smart way to use cryptocurrency's power without any risk.
4. Algorithmic Stablecoins
Algorithmic stablecoins are the high-tech option. They use computer code and smart contracts to control the supply. And the goal behind this is to keep the price stable.
Why were Stablecoins Developed?
The crypto market never sleeps. It is open 24/7. But the old money system, with its banks and wire transfers, has some limitations. It is also slow and costly for moving funds across borders. That’s why stablecoins were developed to fix this problem.
Stable coins built a bridge. They let money move on the internet with the ease of crypto, but with the stable value of the dollar. They solved a huge problem for many traders.
Role of Stablecoins in Cryptocurrency Investing
Stablecoins are not just a safe place to save your cash. They run the whole crypto market smoothly. Here is the detailed explanation of what role stablecoins can play in cryptocurrency investing.
1.Stability and Preservation of Value
When the market takes a dive, you can swap your volatile assets for stablecoins. It means your money stays in the crypto world, but its value is safe from the crash.
2. Hedging against Volatility
After a successful crypto trade, you do not need to cash out into real money to protect your gains. If you make a good profit, you can turn it into stablecoins. This will lock in your win.
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