What are stablecoins?

A stablecoin is different from most cryptocurrencies. Where you can make a lot of money with the volatile prices of, for example, Bitcoin and Ethereum, the value of a stablecoin is always the same. Therefore, the purpose of stablecoin is not the same as that of any other cryptocurrency.

What is a stablecoin?



A stablecoin is a cryptocurrency that always has the same value. This is because this value is linked to that of a fiat currency, such as the euro or dollar, and therefore always has the same value as the fiat currency. A stablecoin can always have the same value because it is backed by an underlying asset.

Where is the stablecoin used for?



At first glance, the usefulness of a stablecoin may seem remote. Yet we can think of several situations for which a stablecoin can be used. These include securing profits or preserving your assets for purchase.

Securing Profits


A stablecoin is ideal for securing profits you've made on crypto investments. Let's say you bought Bitcoin, and then you can sell it for a profit of 200 euros. You will need to sell Bitcoin first to actually make a profit; otherwise, it will remain an unrealized result. You could sell Bitcoin for Ethereum. However, the prices of cryptocurrencies are incredibly volatile, and the price of Ethereum could very well fall after you sell Bitcoin for Ethereum. A drop in the price will wipe out your profits.

It would have been better to sell Bitcoin for a stablecoin equal to the US dollar or euro. This is because the stablecoin is always worth one dollar, which allows you to safeguard your profits against the high volatility of the rates.

Preserving assets for a purchase



When you want to buy cryptocurrency, you will first need to convert fiat money to crypto. You could do that by converting fiat money to stablecoin.

This way, when you think the right time has come, you can buy new cryptocurrency from stablecoin. You won't have to convert fiat money first, which means you can capitalize on favorable rates much faster.

How does a stablecoin work?



A stablecoin that always has the same value as a fiat currency will need to be backed to maintain this constant value. If this is not the case, the stablecoin can never maintain its stable value. This is because the value is then based on trust, we have in the stablecoin, which would cause high fluctuation of the price.

Covered by fiat money



A stablecoin can be backed by a fiat currency, which is also the most common backing. The best-known stablecoin, called Tether, is backed by the US dollar. One Tether is therefore always worth one dollar. The company behind this stablecoin will need to have real dollars in a vault, in order to guarantee coverage.

If this is not the case, then the owners of Tether will have a currency that is based on air. This would cause the exchange rate to crash.

Covered by crypto


Stablecoins do not always have to be covered by fiat currency. It is also possible for a stablecoin to be covered by crypto. The best-known example of a crypto-covered cryptocurrency is DAI.

DAI is backed by MakerDAO. This is an ERC20 token that runs on Ethereum's blockchain. One DAI is always worth one US dollar, while DAI itself is not backed by the dollar.

The team behind DAI solved this in the following way: MakerDAO provides the underlying value of DAI, while smart contracts on Ethereum ensure that DAI is always worth one dollar.

Covered by a flexible supply



A stablecoin does not always have to be backed by fiat currency or crypto. In fact, it is also possible for a stablecoin to be covered by a flexible supply and special algorithms. Yet this type of hedging is not particularly popular.

With the flexible stock, the company behind the stablecoin makes sure that the supply is equal to the demand, in order to guarantee a stable value. To do this, they have built complex algorithms that can do this at lightning speed.

Different types of stablecoin



There are different types of stablecoins. The most important and popular stablecoin is Tether, which runs on Ethereum's blockchain. Binance Smart Chain also has its own stablecoin, called Binance USD. This stablecoin is backed by the US dollar. DAI is also a popular stablecoin that is backed by the MakerDAO cryptocurrency.

Why doesn't Coinmerce sell stablecoins?

The well-known stablecoins we named above are not for sale on Coinmerce. Most of them are pegged to USD while Coinmerce is focused on euro-based countries. However, we offer an alternative, called Coinmerce Coins (CM). This is Coinmerce's own euro. You can trade your CM for your desired crypto. CM is bought directly using iDeal, SEPA, or another payment method.

CM can be used to buy other cryptocurrencies. It is also possible to sell your crypto coins for Coinmerce Coins. This way you can safeguard your profits against the volatility of cryptocurrencies. You can then exchange these coins for euros, which we will transfer to your bank account.

Conclusion


A stablecoin is a cryptocurrency that always has an equal value, often expressed in fiat currency. This means that a stablecoin, for example, is always worth one dollar or euro. The way stablecoin works varies from coin to coin, although most stablecoins are backed by fiat currency. It is also possible for a stablecoin to be backed by other cryptocurrencies, or by a flexible supply.

Tether, Binance USD and DAI have long been among the most popular stablecoins within the crypto space. These coins are not for sale on Coinmerce's crypto exchange. In fact, we have our own coin called Coinmerce Coin (CM). This coin is always worth one euro. You can buy the Coinmerce Coin for fiat money and use it to buy cryptocurrencies. It is also possible to sell your cryptocurrencies for Coinmerce Coins.