As digital currencies continue to tread new grounds by disrupting financial markets, a direct challenge has emerged between Bitcoin and Stablecoin. Let us understand more about their functioning and the key differences between the two assets.
Meaning of Bitcoin
Bitcoin is the leader of the cryptocurrency industry. It acquired huge popularity after Satoshi Nakamoto disclosed the whitepaper in 2008. Bitcoin is known for its volatility as its value keeps on fluctuating depending upon the market conditions and regulatory environment. Traders would have to wait and watch before buying or selling Bitcoins. Bitcoin operates in a decentralized environment without intervention from third parties or authorities.
Stablecoins are also a type of digital currency specifically designed to control the volatility in price. They would be pegged to the value of any related cryptocurrency, fiat currency, or any other commodity. It can overcome the inefficiencies present in the payments system and lead to more financial inclusion.
Why Stablecoins Are Being Increasingly Preferred
- It is considered a store of value as it is backed by assets or fiat currency, making it quite similar to money.
- There is no possibility of undervaluation or overvaluation as it focusses on maintaining stability in value.
- Stablecoins can be utilized for paying off loans, rent, and other subscriptions. It is traceable, irreversible, and transparent.
- It can be widely used for cross-border payments and remittances at a negligible cost as there is no conversion for fiat currencies.
- It can act as a viable alternative by serving the underbanked and unbanked sections of the population.
- With more control over volatility, uncertainty is reduced for the traders. Fluctuating cryptocurrency investments can also be safely converted into stablecoins.
- Since it has no minimum limit fixed, users can use it to transfer a limited amount of funds between each other. Hence stablecoins facilitate peer to peer trading.
- Users are also given redemption guarantee at face value.
- Stablecoins can be embedded into various digital applications quickly due to their open architecture, unlike the cumbersome processes witnessed in the proprietary legacy systems of banks.
- Stablecoins are not affected by market conditions as they do not have a limited supply.
What Are the Different Kinds of Stablecoins
There are four major kinds of stablecoins operating in the market today. They are
- Fiat-collateralized stablecoins – They would be pegged to highly demanded fiat currencies such as the US Dollar or Euro. It depends on the value determined by a centralized system. The flow of fiat currencies in the system is managed by third parties. Tether is the best example of a Fiat-collateralized stablecoin. It is denoted by USDT and initially claimed that each token was backed by one US Dollar.
- Crypto-collateralized stablecoins – This type of stablecoin is backed by a leading cryptocurrency or a group of digital coins. Its value depends on the demand and supply conditions along with the governance standards for underlying assets. Popular examples of a Crypto-collateralized stablecoin would be DAI and BitUSD. A part of the investor’s holdings will be locked as collateral, and they would be provided with a stablecoin once the funds are returned.
- Non-collateralized stablecoins – They are not backed by any assets. non-collateralized stablecoins use mathematical algorithms to control the demand and supply conditions. Famous examples of Non-collateralized stablecoins are CarbonUSD and kUSD (Kowala). The focus would be on maintaining optimization as a new demand generated would be backed up by additional supply being created.
- Commodity-collateralized stablecoins – Their value is backed by well-known commodities such as gold, silver, and oil. A well-known example would be Digix, which represents physical gold with tokens. Tiberius is also a popular stablecoin as it is backed by seven metals such as copper, aluminum, nickel, cobalt, tin, gold, and platinum. The choice of metals made by the investor will determine his rational spread of risk.
Why Stablecoins are the Future
- During situations such as a market crash, users would prefer low volatility. Hence, stablecoins tick the right boxes as their value is more or less predictable.
- Stablecoins can be used as a medium of exchange because of their intrinsic value.
- Traders who look to avoid losses to their portfolio during a downturn would prefer Stablecoins.
- Top banks such as the People’s Bank of China and the European Central Bank are looking to issue their own stablecoins.
- The different hurdles in transferring funds and depending on exchange rates can be overcome through Stablecoins.
- With the help of blockchain technology, all parties would have equal access to the transaction records through smart contracts.
- It maintains price parity and is available 24×7.
Obstacles to Stablecoin
- Since it backs itself with the support of fiat currencies, it requires the support of third parties or an independent entity.
- Due to its priority towards stability, the return on investment would be quite low. Hence, investors may prefer other traditional investment avenues such as stock markets or real estate.
- It is vulnerable during a market crash as it can never be liquidated.
- The scheme of implementation is complex as it needs the support of several fiat currencies.
- With the likes of Tether facing heat from regulators regarding its 100% backing of the US Dollar, all stablecoins require an independent third-party audit.
- Since it is a relatively new technology, it will take a lot of time for mass adoption.
- Stablecoins struggle to work in a decentralized system. Their structure is quite centralized, which negates the original purpose of Blockchain.
Will Stablecoins Replace Bitcoin?
- As the world looks at stability and certainty, Stablecoins would be a safer bet than Bitcoins.
- The value can be easily known by checking the account balance and comparing it with the pegged fiat currency.
- It ensures faster money transfers across different locations at a negligible cost.
- The acceptance of stablecoins among investors also depends on the extent of volatility in the cryptocurrency market.
- Though it acts as a solution to short-term volatility, it might witness a fall in price if its ability to redeem the supported currency is at risk.
- It should be able to provide an adequate supply of coins if the demand increases.
- Stablecoins would be preferred by investors in those countries where the value of the local currency is highly unstable.
As investors compare the benefits of Bitcoin and Stablecoin, it all boils down to the confidence with which it is traded that ultimately affects the value. With an experienced developer team that possesses meticulous knowledge of the latest market trends, Blockchain App Factory provides reliable Stablecoin development services that assure higher growth for your business.