What are Stablecoins and Who Cares?
Weekly Investment Update | By Brian Schreiner
A stablecoin is a type of cryptocurrency designed to maintain a stable value. Unlike more volatile cryptocurrencies like bitcoin and ethereum, stablecoins are pegged to a reserve asset, such as the U.S. dollar.
Most commonly, stablecoins are fiat-collateralized. Two coins backed by U.S. dollars are the most common. USD Coin (USCD) and Tether (USDT) make up about 90% of the stablecoin market. For every one USCD or USTD coin issued, one U.S. dollar is held in reserve and regularly audited to ensure the peg is fully backed.
Digital dollars, who cares?
Stablecoins are important for several reasons. Most importantly, they act as a bridge between the traditional financial system and the growing digital monetary network.
Stablecoins offer a more stable and predictable entry point for individuals and institutions who want to hedge or entirely avoid the volatility of other cryptocurrencies. They make the transition from the traditional centralized financial system to the decentralized digital system easier for newcomers and traditional investors.
Enhancing trading and liquidity: Within the crypto market, stablecoins like USDT and USDC are widely used as trading pairs for Bitcoin and other cryptocurrencies. Traders often convert their Bitcoin into stablecoins to lock in profits or to temporarily escape market volatility without exiting the crypto ecosystem entirely, providing liquidity and flexibility within the crypto market.
Enabling efficient transactions: While Bitcoin can be slow and expensive for everyday transactions, stablecoins offer faster and cheaper transfers on certain blockchains. This makes them a more practical choice for payments, remittances, and other applications where speed and low cost are crucial, potentially encouraging the wider adoption of digital assets.
Supporting the growth of DeFi: Stablecoins are essential components of the Decentralized Finance (DeFi) ecosystem, serving as collateral for loans, enabling yield capture, and facilitating other financial applications that require a stable store of value on the blockchain. This expanded functionality for digital assets ultimately benefits the entire crypto space, including Bitcoin, by fostering innovation and attracting more users.
Potential for mainstream adoption: The development of regulations like the GENIUS Act signifies a growing recognition of stablecoins by governments and traditional financial institutions. This will lead to increased mainstream adoption, which will benefit Bitcoin (AKA “digital gold”) by bringing more participants into the broader crypto economy.
Stablecoins are the next step in the naturally evolving transition to modernize the global payment system. The current financial and payments infrastructure is expensive, vulnerable and relatively insecure. The existing infrastructure is consolidating and experiencing increasingly severe failures, as evidenced by massive security and data breaches, fraudulent transactions, counterfeiting and hacks. These vulnerabilities are inherent in centralized systems. New and better systems will naturally displace them.
The transition to a more secure, decentralized network is inevitable. It will take a few more years for the average person to begin making the transition because the average person doesn’t do much of anything on their own - they must be told what to do.
Blockchain networks are not run by governments or corporations (the institutions telling people what to do), so they will be resisted, at least to some degree, so the transition may take longer than we think. For early adopters, that’s ok. Slow adoption means plenty of time to keep making profits. Everyone will buy bitcoin eventually, at the price they deserve. α
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