What Is a Stablecoin? A Beginner's Guide to Where and How to Buy Stablecoins
Main TakeawaysÂ
Stablecoins serve as a bridge between the crypto world and traditional currencies, with their value tied to reserve assets like the US dollar, euro, or gold.
They are particularly popular in the crypto space for storing and trading value, especially in regions battling high inflation.
Learn everything you need to know about stablecoins and how to easily purchase them on Binance.
In the often volatile cryptocurrency market, stability is both essential and valued. Stablecoins offer the best of both worlds by combining the relative stability of traditional assets with the flexibility of crypto.
Digital assets like bitcoin and ether offer many benefits, including decentralization, intermediary-free transactions, and much more. However, one of cryptocurrenciesâ key drawbacks is that many of these assets can be remarkably volatile, meaning the prices are harder to predict and have a tendency to fluctuate significantly. Although the exact mechanisms vary from one coin to the other, reserve-backed stablecoins are built to be somewhat resistant to that volatility, so you wonât see significant price changes against reference assets.
In this article, we will take a deep dive into what stablecoins are, their importance, benefits, and use cases in the crypto space, as well as examples of stablecoins available on the market and how to buy stablecoins with local currencies.Â
What Are Stablecoins?
Stablecoins are a class of cryptocurrencies designed to offer price stability relative to a certain reference asset. A stablecoinâs value is fixed, or âpeggedâ â through various mechanisms, depending on the design of each stablecoin â to the value of a âstableâ reserve asset like the US dollar, euro, or gold. In essence, a stablecoin is a digital asset that exists on the blockchain while maintaining the same value as a currency or commodity that it tracks.
Assets such as backed stablecoins can give risk-averse buyers and sellers certainty that the value of their tokens wonât rise or crash unpredictably in the near future. For both beginners and seasoned traders, the stable and certain nature of backed stablecoins makes them a good asset to hold on to or invest in, especially during the bear market seasons.Â
How Do Stablecoins Work?Â
Stablecoins maintain their value by being pegged to stable assets like fiat currencies (USD), commodities (gold), or through algorithms that manage supply. This ensures minimal price fluctuations, making them ideal for trading and storing value.Â
There are two main types of pegging mechanisms: backed and algorithmic. Backed stablecoins hold reserves such as dollars or gold to maintain their value, while algorithmic stablecoins rely on smart contracts to control supply. However, it is crucial to note that algorithmic stablecoins have a mixed track record, as their reliance on complex systems may sometimes lead to failures.
Therefore, it's essential to understand how each stablecoin maintains its value and assess the mechanismâs reliability, as no system is entirely risk-free.
Why Are Stablecoins Useful?
1. Stability in a volatile market
Stablecoins provide the same value to crypto investors and traders as fiat currency offers to participants in traditional markets: price stability. For instance, while traditional investors might choose to allocate portions of their portfolios to cash or treasury bonds when volatility rises, crypto investors can move to fiat or gold-backed stablecoins. Collateralized stablecoins that rely on more volatile assets such as other cryptocurrencies can be risky, so always DYOR (do your own research) before you invest, and never assume that a stablecoin will always be successful in maintaining its value. There are historical examples of poorly designed stablecoins losing their peg, which led to investors suffering monetary losses.
2. Efficiency of remaining in crypto
Crypto investors and traders often turn to backed stablecoins during volatile market conditions. Utilizing stablecoins allows funds to remain within the cryptocurrency market, as users donât have to cash out into fiat each time they want to preserve the value of their funds amid volatility or lock in profits. The use of stablecoins also allows for swifter movement of funds between trades without the delays associated with transferring fiat money when users get back to trading crypto.Â
The stable and efficient nature of fiat or gold-backed stablecoins provides a mechanism for protecting the value of digital funds even amid challenging market conditions, which inspires confidence and empowers more people to engage in the market. This increased participation has led to higher trading volumes and market capitalization, resulting in greater liquidity. Enhanced liquidity makes the crypto market more efficient, bringing more accurate and fair asset pricing.
3. A digital alternative to traditional savings
Stablecoins have become increasingly popular as a method of storing and trading value in the crypto economy. Instead of holding dollar or euro savings in a traditional bank account, users can purchase stablecoins with local currencies on Binance and subscribe to Earn. This allows them to store value and earn income, often at interest rates higher than those offered by traditional financial institutions.
At Binance, we offer an extensive suite of products to serve your financial needs. Crypto investors can choose to buy stablecoins such as USDT, USDC, and EURI on the âBuy Cryptoâ page and earn compound interest via Binance Earn. In addition, you can make recurring purchases of stablecoins via Recurring Buy.Â
4. Easy and quick transfer of assetsÂ
You donât need a bank account to hold stablecoins, and theyâre easy to transfer with fast processing times and low transaction fees. In addition, stablecoins can be transferred quickly internationally, including to places where the US dollar may be hard to obtain or where the local currency is unstable.Â
Popular Stablecoins
Stablecoins are designed to be a reliable asset class in a volatile market. Listed below are some of the most popular coins you can consider adding to your crypto portfolio:
Dai (DAI), at price of $0.99 and $ 5.3B market capÂ
TrueUSD (TUSD), at price of $0.99 and $ 495M market capÂ
Eurite (EURI), at price of $1.12 and 32.5M market cap
* These prices are valid as of 24 Sep 2024.
* This list is ranked according to market cap and does not constitute a recommendation or endorsement by Binance to buy or sell any currency.
Where And How to Buy Stablecoins?
Looking to purchase stablecoins? On Binance, there are different options available for buying cryptocurrencies. You can either make a fiat deposit or use a debit/credit card to purchase crypto.
Option 1:
Make a fiat deposit via bank transfer, e-wallet transfer, or bank card.Â
Exchange fiat for the stablecoin of your choice using your wallet balance.Â
Option 2:
Purchase crypto directly with a VISA or Mastercard credit/debit card.
Final Thoughts
Stablecoins have become an essential part of the crypto ecosystem, offering a stable and reliable way for traders and investors to store and trade value. With their ability to bridge the gap between traditional finance and the crypto market, stablecoins provide the flexibility to move funds quickly and efficiently without the need to cash out into fiat. Whether you're looking to hedge against market volatility, earn interest through platforms like Binance Earn, or make fast, low-cost transfers, stablecoins serve as a valuable tool for navigating the evolving digital economy. As their utility continues to grow, stablecoins will remain a crucial asset in ensuring liquidity, fostering greater participation in the cryptocurrency market.
Disclaimer: Cryptocurrency investment is subject to high market risk. Binance is not responsible for any of your trading losses. The opinions and statements made above should not be considered financial advice.
Further Reading
Disclaimer: In compliance with MiCA requirements, unauthorized stablecoins are subject to certain restrictions for EEA users. For more information, please click here.