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What are Stablecoins? What You Need to Know about Volatility and its Solution

What are stablecoins?

That is the hottest million-dollar question today—not “what is crypto?” or “what is Bitcoin?”.

Why is that, though? Well, if you are new to investing in cryptocurrencies, you should know about the problem of volatility, first.

Therefore, before we help you answer the question, “what are stablecoins?”, you should read this, first.

The problem of volatility in cryptocurrencies

While Bitcoin revolutionized the world of online transactions and trading, it is also highly volatile. This is a serious issue among capital investors and users.

Now, why does volatility matter? First, let us define it.

Volatility, as defined by Economic Times, is the rate of rising and sinking of a security’s price. In the cryptocurrency world, it is the unpredictable price movement of cryptos.

For example, the Bitcoin’s value can drastically sink from more than $17,000 to $15,000 in just less than a day. Recently, it was reported that Bitcoin’s value ranges from $5,000 to $7,000. However, a forecast also predicts that the value of Bitcoin will rise to $23,499.

With this type of volatility, it’s challenging for capital investors and specifically the users, to trust Bitcoin.

How can they use such a volatile currency for day-to-day transactions?

If the original goal of Bitcoin was to become the reliable currency for the masses, then it has failed. In addition, its notoriously volatile nature makes its value, as currency— and the crypto market— look bad.

Now, fortunately, developers and traders have come up with a brilliant solution to that—stablecoins.

So, what are stablecoins? 

Stablecoins are cryptocurrencies that have stable price characteristics—far from Bitcoin’s volatile nature. This means that stablecoins, as a currency, have greater chances of being used for daily transactions.

Even better, with stablecoins, investors can avoid market crashes, which might have an impact on fiat currencies.

What is the most stable crypto?

Now, there are three different types of stablecoins.

1. Fiat-collateralized Stablecoins

Traditional assets, such as dollars, oil, or Gold and Silver, back these centralized cryptocurrencies.

Although an intermediary is present to issue tokens as the assets’ representatives, it also has its benefits. With these stablecoins, everything is straightforward as the crypto-coin ratio is 1:1. Therefore, the operations are simple.

2. Crypto-Collateralized Stablecoins

Unlike the previous type, these decentralized cryptos are backed by digital assets—usually cryptocurrency reserves. They also work similarly to fiat-collateralized coins; the only difference is the assets are not tangible.

This type of stablecoin is gaining popularity; however, there are risks that surround it. Some of it is its complexity and the dangers of liquidation, in the case of major depreciation.

3. Non-Collateralized Stablecoins

Now, this is significantly different from the previous two. Since this type of stablecoin has no collateral, it depends on Seniorage Shares.

With this type of stablecoin, a network releases new coins whenever the stablecoins’ value rises. On the other hand, it also burns the coins if the value sinks.

A contract is also used to release a currency with a $1 value.  If the price rises more than that price, the supplies will also increase.

Now, if you are wondering what’s the most stable crypto?

The answer would be fiat-collateralized stablecoins, like the Kinesis Money.

Backed by highly stable assets like Gold and Silver, users, traders, and investors can rest easy with their investments. With its increasing developments, volatility will now be a myth.

Now, for more information about volatility and stablecoins, check out this guide, an article about stablecoins by Kinesis Money

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