What Are Stable Coins? Learn How Stablecoins Work With Crypto And NFTs!

What Is A Stablecoin?

A stablecoin is a digital currency that is pegged to a cryptocurrency token which is usually pegged to the US dollar. They are designed to be stable.

Stablecoins bridge cryptocurrencies with fiat currency.

Why Are Stablecoins Important To Crypto And NFT Investors?

Stablecoins are very important in the crypto ecosystem. They allow investors to take profits on volatile cryptocurrencies and cash out into a cryptocurrency pegged to the US dollar. This protects investors’ profits until they wish to reinvest in another cryptocurrency.

Stablecoins were designed as a flight to safety when the crypto market looks uncertain.

Stablecoins are global, have high liquidity, available 24/7, are fast and secure.

What Are The Most Popular Stablecoins?

What Is USDC?

“USDC is a digital dollar, also known as a stablecoin, that’s available 24/7 and moves at internet speed. USDC lives natively on the internet, running on many of the world’s most advanced blockchains. Billions of USDC change hands every day1, and every digital dollar of USDC can always be exchanged 1:1 for cash.” Source: Circle

What Is Tether?

“Tether tokens are the most widely adopted stablecoins, having pioneered the concept in the digital token space. A disruptor to the conventional financial system and a trailblazer in the digital use of traditional currencies, Tether tokens support and empower growing ventures and innovation throughout the blockchain space. Tether tokens exist as a digital token built on multiple blockchains.”

“All Tether tokens (USD₮) are pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether’s reserves. We publish a daily record of the current total assets and reserves.” Source: Tether

What Is BUSD?

BUSD is a stablecoin owned and operated by the Binance crypto exchange.

“BUSD is a regulated, fiat-backed stablecoin pegged to the U.S. dollar. For every unit of BUSD, there is one U.S. dollar held in reserve. In other words, the supply of BUSD is pegged to the U.S. dollar at a 1:1 ratio. Holders can swap their tokens for fiat and vice versa. Paxos, the token’s issuer, releases monthly attestations of BUSD’s reserves.”

“As a stablecoin, BUSD is designed to maintain a stable market value. It allows investors and traders to hold a low-volatility asset on the blockchain without the need to exit the crypto space.” Source: Binance

How Large Is The Stablecoin Market?

Tether – The tether stablecoin market cap is currently 73 billion US dollars.

USDC – The USDC stablecoin market cap is currently 38 billion US dollars.

BUSD – The BUSD stablecoin market cap is currently 8 billion US dollars.

How Can NFT And Crypto Investors Utilise Stablecoins?

1. Income

Investors can stake their stablecoins and earn interest on them. This means, investors can earn money on their capital while they wait for a new trade.

2. Capital Protection

When the crypto market looks unstable, investors can convert their crypto (needed to buy other cryptos or NFTs) into a stablecoin and protect their downside.

If the crypto market drops, the price of a popular cryptocurrency (ETH) will be lower in dollar valuation. Thus, investors can purchase more ETH on the dip and have more buying power for an NFT or flip for a profit when the price recovers.

3. Access To The US Dollar

Stablecoins are very liquid and can be sent across the world instantly. This is useful for investors that do not have access to the US dollar or take profit and want to retain their money in the US dollar. You do not need a US bank account to hold US-denominated cryptocurrency.

4. Minimize Volatility

The value of coins like Bitcoin and Ethereum fluctuates a lot. Their price can move up or down in a matter of minutes and as much as 5% or more in a day. Stablecoins allow investors to protect themselves from these wild swings.

Are Stablecoins Safe?

Stablecoins are designed to remain stable, liquid, and safe. This has not always been the case.

Have a look at the Tether chart:

You can see that over the space of a year, Tether has not remained at $1. It has dipped and peaked.

Now let’s have a look at the next largest stablecoin:

As you can see, during March 2023, USDC had a big drop from its $1 peg.

Finally, let’s look at the third largest stablecoin, BUSD:
During March, 2023, BUSD also had a large drop in value.

Why did these stablecoins drop in value below their $1 peg? One word FUD.

USDC recently dropped due to 10% of their reserves being held in the now collapsed bank Silicon Valley Bank (SVB).

Tether dropped due to not being regulated and investors becoming worried (at times) if they have enough reserves to cash everyone out if there was ever a run on the tether token. There has also been speculation that Tether does not hold enough US dollars.

On a plus note, these stablecoins all recovered within a few days back to their one-dollar peg.

Before USDC’s recent drop, it was considered the most stable of all stablecoins due to being regulated and audited regularly by US financial institutions.

What Did Investors Do During the USDC Drop?

In March, 2023, there was panic amongst crypto and NFT investors. Especially Solana NFT investors, as USDC is the stablecoin used by NFT traders to buy and sell Solana that they use to purchase NFTs.

Solana NFT investors didn’t have anywhere to run to as the Phantom wallet (used for Solana NFT investing) only uses USDC as the go-to stablecoin.

I know a few large NFT investors, and they did one of three things:

1. Investors held their USDC as they believed the dip was a panic moment and that it would recover. USDC recovered.

2. Some investors sold at a small loss and bought the Solana cryptocurrency. They reasoned that they could make up any USDC losses when Solana went up in value (it did) or they could use the Solana to speculate on NFT collections and make gains.

3. Some sold their USDC into fiat dollars. Investors had to be very fast as many exchanges halted trading on USDC, and investors were not able to sell into fiat.

What Is The Future Of Stablecoins?

This is unknown for now. However, we believe a better system and selection of stablecoins are needed for this industry to grow and attract more risk-averse investors.

We will see large (regulated) institutions move into the stablecoin as Meta tried to do with their Diem token.

In a few years, we might see CBDC used as stable coins on exchanges.

You can read more articles about NFTs in the blog section of our website.

You can also visit our NFT resource directory to find useful links to help you invest in NFT more effectively.

Visit us today at spendingcrypto.com

Author:
Jonathan Titley

Founder:
spendingcrypto.com

Co-founder:
https://fomomagazine.io
https://twitter.com/MagFomo
(NFT industry magazine and project reviews)

We also offer NFT consulting for individuals and NFT projects. Contact us.

Disclaimer:

All information in this article is for educational purposes only.

Jonathan Titley
Author: Jonathan Titley