The growing demand for cryptocurrency and the increasing use cases that investors have noticed have forced many of us to invest in digital assets. Huge returns noted in recent years by currencies such as bitcoin and other cryptocurrencies have fueled demand, making the market all the more volatile. How do you reduce risk and maximize return in such a market? That’s when stablecoins come into the picture.

Stablecoins, simply put, are cryptocurrencies with very little volatility and stability in prices as they are backed by cash and cash assets, keeping their prices predictable with minimal risk. Since the probability of a million dollar cryptocurrency going to insignificance is a possibility in a very short span of time, stablecoins are used to bridge the bridges between fiat and crypto for payments, lending, trading and alternative banking transactions.

However, currencies such as bitcoin and ethereum are highly volatile as they grow and fall in erratic patterns. This is something that stablecoins eliminate. But given that it is backed by fiat itself, it begs the question of whether a stablecoin is indeed a cryptocurrency or a digitized version of fiat currency. Your guess here is probably the same as ours. Stablecoins fall into the gray area and draw similarities from both worlds.

Fiat-backed stablecoins are restricted by all regulations associated with fiat currency, compromising the efficiency of the conversion process and the potential efficacy of the digital asset itself. For example, Facebook’s Libra currency promised a stablecoin backed by a basket of global fiat currencies, increasing the coin’s appeal and utility. However, it received so much regulatory backlash that the project’s management had to drop it. To this day, the network is still struggling to get regulators to sanction its own stablecoin. Not only this, but all stablecoins require third-party regulation, which makes it very difficult for them to join the real decentralization movement.

Stablecoins are useful because they make it easier for users to transact in cryptocurrencies. They provide a link between volatile cryptocurrencies and real-world assets such as fiat currency. By trading stablecoins instead of US dollars, you can keep all your trades within crypto exchanges while avoiding the fees charged by many exchanges and preserving the anonymity of the transaction. Stablecoins are used as a bridge between cryptos running on different networks without a user having to fall back on fiat currencies for conversion.

While stablecoins are great intermediaries for the decentralization movement, that may not be enough to be accepted into the mainstream cryptocurrency family as their value is derived from fiat currencies, commodities, other cryptocurrencies and/or algorithms. What started as a means of reducing the volatility that cryptos bring has become a mainstay for decentralization. Without missing the whole independence aspect, the point of having a cryptocurrency is lost when it is backed by fiat currency.

This post Stablecoin: Should You Really Treat Stablecoin Like Regular Cryptocurrency?

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