While many have recently started purchasing bitcoin out of the fear of missing out (FOMO), there is still some speculation about the basis for its growth. Currently, the high price of bitcoin exists since users agree on the value, and the value continues to be maintained. However, at any moment, the value could be lost since digital assets have no intrinsic value. As a result, many investors are seeking something more stable; hence, the stablecoin. Stablecoins are a newer type of token created in response to volatility concerns. These digital currencies leverage blockchain technology for their transactions like bitcoin and Ethereum but are less volatile since they peg their value to an asset such as another cryptocurrency, a commodity, or a fiat currency. This combination of features allows stablecoins to take advantage of the best parts of crypto and fiat currencies.
These currencies can be purchased in a similar way to that of any other cryptocurrency through an online exchange such as Gold Exchange or Coinbase. With significant advancements in the ease of use, many wonder just what problems crypto-backed by traditional currencies can help solve.
Stablecoins have become increasingly popular in countries that experience periods of high inflation. In fact, the International Monetary Fund (IMF) has even predicted that countries that have weaker local currencies will find that their citizens will shun these fiat currencies. Instead, they will take up the usage of stablecoins that are backed by a stronger asset. One example of this is in Venezuela, where a period of hyperinflation devalued their currency by over 95%, causing many to lose faith in it. Stablecoin initiatives like Valiu have since taken place as a synthetic dollar for Venezuelan citizens.
Hedging volatility for investors looking for safe long-term investments
The most well-known problem solved by stablecoins is reducing the volatility that investors experience from owning bitcoin. Since the price of stablecoins is more predictable, they are positioned as the cryptocurrency safe haven. Investors looking for less risky opportunities to get involved in the cryptocurrency space may then decide to stick to stablecoin investments for less fear of losing their life savings in a violent price swing. Since some stablecoins are tied to gold or other precious metals, they offer investors the peace of mind of thousands of years of price growth.
Helping businesses achieve business growth
Stablecoins can be backed by various world currencies, from the U.S. dollar to the precious metal gold. These currencies are then considered one of the best ways for entrepreneurs and startup managers to pursue capital acquisitions. Investors and lenders can leverage stablecoins to help move funds into a startup and payout investors without worry about abiding by the regulations of traditional banking systems, which also may charge higher fees.
Furthermore, the flexibility of the asset allows business owners to accelerate how they can manage funds across the globe. Since cryptocurrencies are decentralized, no third-party is needed to check, process or verify payments and transfers. Some importers in China are already using stablecoins to help them facilitate trades without capital controls. While this was typically done with bitcoin, stablecoins were seen as a more advisable option to avoid the uncertainty that comes with price fluctuations.
Support cross-border payments
For migrant workers, stablecoins offer value in that they can support the movement of money from their working country to their family. Currently, making these types of payments can be costly and take long periods to facilitate. The World Bank suggests that more money is being sent to and from low and middle-income countries than ever before. In fact, the amount is said to be over 520 billion dollars, with fees of between 7 and 11%. This truly has devastating effects on the economic support that can be provided to the families of immigrant workers. Stablecoins have since arisen as both a faster and cheaper alternative to send money home.
With many of the current world economic problems being solved by stablecoins, it is believed to be only a matter of time before these coins experience more widespread adoption.