As your crypto investment strategy begins to expand, it’s vital to learn about stablecoins and how they can help you to secure higher ROIs. Stablecoins are a special type of cryptocurrency in that they derive their value from an underlying asset rather than based on their market cap. In this way, they play a vital role as a safe haven during times of market volatility.
Why Stablecoins are Vital to the Market
Stablecoins play an integral part in the market today. These coins enable traders to escape market downturns without directly leaving the decentralized economy. Prior to the introduction of stablecoins, traders would have to convert their funds to fiat currency to accomplish this task. Sadly, there are a lot of fees and additional regulations that go along with converting crypto into fiat.
Today, the stablecoin market has multiple projects valued in the billions. There are stablecoins pegged to nearly every type of asset. You have coins that derive their value from fiat currencies such as the USD, all the way to coins that get their value from diamond mining operations, and everything in between. Here are the top stablecoins to take your investment strategy to the next level in 2021.
Tether (USDT) is the top performing stablecoin in terms of market cap and trading volume. The coin earned this position as a pioneer in the market. Tether’s whitepaper was published in July 2014. The project caught the immediate attention of the market as its publishers included some of the most reputable names in the market. Specifically, co-founders Brock Pierce, Reeve Collins, and Craig Sellars.
Tether took the stablecoin market to new heights when it got listed on Bitfinex in January 2015. The listing helped prove the stablecoin concept. However, researchers began to question Tether’s solvency. Notably, the International Consortium of Investigative Journalists released a report that showed Tether and Bitfinex shared the same management and corporate structure.
While you may think this revelation could pose a problem in the market. Tether was able to rebound and continues to be the top fiat-backed stable coin in the industry. The company has branched out and now provides a variety of other popular stablecoin projects.
Fiat-backed Stable Coins Concerns
The Tether fiasco served as a reminder to the market that transparency should always be the main concern for investors. Tether eventually converted its documents to state that its stablecoin is backed by fiat currency and other assets. This maneuver gave the firm more room in terms of accountability. It also helped drive innovation as developers pushed for other stablecoin types.
DAI is a crypto-backed stablecoin that lives on the Ethereum blockchain. There are some advantages gained from a crypto-backed strategy. For one, you gain full transparency. Anyone can see the pegged assets because all assets for the equation live on the blockchain. This approach eliminates the need to trust a third party to keep care of fiat currency or other assets.
DAI accomplishes this task via the TRFM mechanism. The system leverages smart contracts that hold Ethereum. These contracts are publicly available to anyone seeking to monitor their holdings. The system maintains the Target Price of 1 Dai:1 USD by adjusting the amount of Ethereum in the contracts.
Crypto-Backed Stablecoin Concerns
The main issue with crypto-backed stable coins is that they rely on another crypto asset to retain value. If for some reason, the project that they are pegged to drops in value considerably, the stablecoin could lose its peg. To combat this issue, it’s common to see this style of stablecoin pegged to multiple cryptocurrencies.
TetherGold is a commodity-backed token that was created to provide medium and advanced investors access to gold-backed stable coins. TetherGold is a popular project. The concept is that every bar of gold is listed to a specific token when entering the wallet address. Using the AUXt, you can reclaim the exact piece of gold your token represents.
One TetherGold equates to one troy ounce of gold on one London Good Delivery bar. In this way, anyone can exchange their crypto for physical gold or redeem it for cash. Like TetherUSD, users will need to place some trust in the firm as the company holds its gold at the old reserves in Swiss vaults.
Problems with Commodity backed tokens
One of the main problems facing the commodity-backed stable coin market is the financial barriers. For example, the minimum purchase amount for TetherGold is 50 XAUt, that’s around $93,000. Projects like META 1 help eliminate these barriers by introducing gold and multi-asset-backed stablecoins at lower price points.
META 1 Stablecoin
The META1 Stablecoin represents the evolution of the market. META1 operates as a hybrid stablecoin that improves efficiency and security in the sector. The coin leverages the stability of an actively producing gold mining operation and combines it with the algorithmic-backed security of a crypto-backed coin.
META 1 represents an entirely new approach to the market. The token is pegged to real assets and utilizes some smart contracts to ensure appreciation. For example, META1 coin token holders can’t sell their assets under asset value.
Interestingly, the META1 stablecoin is just a small facet of the platform’s overall goals. The network includes full DeFi functionality including high yield savings accounts and crypto debit cards. There’s also a powerful DEX that enables users to convert their META1 into any of their favorite coins securely.
Stablecoins You Should Know
Now that you have a better understanding of what stablecoins are making moves in the market, you are ready to further your strategy. Each of these coins has earned a reputation as a safe investment. However, you must always DYOR to ensure that you avoid any unnecessary losses.