People discussing stablecoin data
Source: istock

Are Stablecoins a Safer Way to Engage in Crypto Transactions?

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Sep. 21 2021, Published 7:36 a.m. ET

The concept of cryptocurrency can be confusing to some and not trustworthy to others. But the potential benefits that they offer can’t be denied. Cryptocurrencies offer a way to complete transactions without having to worry about a bank or authoritative figure. However, crypto assets have been hacked and stolen from crypto exchanges. It would be beneficial if there was a middle ground where crypto can be secure and reliable but allows people to have some financial freedom when using it.

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Stablecoins are a way for people to use cryptocurrency more safely than altcoins. They have been adopted more by cryptocurrency exchanges. Some exchanges even offer compensation if you buy stablecoins or lend them out. Stablecoins are deemed to be the best way for governments around the world to adopt them into their financial infrastructure. But before stablecoins can be adopted, consumers must know what they are and how they can be used.

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How do stablecoins work?

Stablecoins are cryptocurrencies that are backed by an asset like the U.S. dollar or gold. As a result, stablecoins are much less volatile and more stable than traditional tokens like Bitcoin and Ethereum. We’ve seen crypto become introduced as legal tender in El Salvador—the first country to make Bitcoin legal tender. However, there have been concerns about making cryptos like Bitcoin legal tender because there's so much volatility surrounding the tokens.

Altcoin prices can drop or skyrocket for the most random reasons like a tweet or a celebrity endorsement. We’ve seen Dogecoin's price fluctuate heavily at times simply because Elon Musk tweeted about it or something related to it. This is one of the biggest concerns with crypto being introduced into federal financial entities.

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How do stablecoins make money?

There are stablecoins including Tether (USDT), USD Coin (USDC), and Binance Coin (BUSD) that allow you to make transactions on online marketplaces that accept crypto like NFT marketplaces. You don’t have to worry about banks or other entities interfering with transactions. Tether was supposed to be a promising stablecoin, but the token is centralized. It's issued by Tether Limited, which has been in question recently.

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Tether is the biggest stablecoin by market capitalization at over $68 billion. Its market cap is more than twice the market cap of USD Coin, which has over a $29 billion market cap. Tether likely won't be the stablecoin of the future after it was reportedly accused of moving hundreds of millions of dollars to cover up $850 million worth of losses, according to CNBC. Tether Limited reached a settlement with the New York attorney general’s office after being probed.

USD Coin likely has the best chance to become some form of legal tender in the U.S. It has the second-highest market cap among stablecoins and is reliable for transactions. USD Coin is backed by the U.S. dollar and is available on various exchanges for only $1 excluding fees. Coinbase plans to give consumers the ability to lend out USDC to others while earning interest and still being able to hold the USDC they already have.

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