Cryptocurrency is notoriously volatile, which reduces mainstream participation and limits its use (generally) as a usable platform of exchange for goods and services. The stablecoin is a low volatility version of a cryptocurrency. Reducing volatility can be achieved in a number of ways, including backing the coin with a stable asset.

Stablecoins are useful for investors who want to keep their assets in the crypto space. Switching from crypto to fiat currency can be expensive and time consuming. Stablecoins give investors the best of both worlds — a stable asset within the crypto space with an advantageous transactional speed. 

Because of the relative stability, stablecoins also have an easier time staying in compliance with regulators. The Gemini Dollar (GUSD) and the Paxos Standard (PAX) are 2 examples of coins to win the regulatory approval of the New York State Department of Financial Services.

What is Stablecoin?

A stablecoin is a cryptocurrency that is meant to limit the volatility that investors experience when using crypto. Stablecoins are usually pegged to another asset with a stable value, but they may also be backed by an algorithm. 

Consumers who are looking to buy or sell non-currency goods and services may experience a huge price change during or after the transaction. Stablecoins level the playing field without a need for either party to change back into fiat.

Stablecoins began to rise in popularity after the 2017 mania. After bitcoin rose to almost $20,000 then fell by more than 50%, investors were looking for a less volatile crypto based store of value. The success of crypto based coins led to the Federal Reserve to announce an investigation into its own digital coin along with the governments and central banks of other countries.

Types of Stablecoins

There are many different kinds of stablecoins, differentiated primarily by the asset that backs them. Here are the major types:

Commodity Backed Stablecoins

Commodity-backed stablecoins are stabilized with hard assets such as gold or real estate. The most commonly used asset to collateralize stablecoins is gold, although many use diversified baskets of precious metals.

Fiat Backed Stablecoins

Stablecoins backed by fiat currencies like Chinese yuan keep a reserve of that currency as collateral. Other forms of fiat include precious metals such as platinum or silver and commodities such as corn or oil. 

Most fiat backed stablecoins are backed with dollar reserves. The reserve for the currency is administered through an independent custodian that is audited on a scheduled basis to ensure compliance.

Crypto Backed Stablecoins

Crypto can back other crypto as well. Such is the case with crypto backed stablecoins. To counteract the higher relative volatility of backing stablecoins through crypto, the coin will maintain an overcollateralized position. 

In other words, the stablecoin will circulate a much lower supply against the reserve as compared to fiat backed currencies. For instance, a crypto backed stablecoin may issue only $500 worth of coins for every $2,000 of crypto in reserves rather than keeping a 1-to-1 ratio.

Siegniorage Style Stablecoins

Siegniorage are governed through and backed by an algorithm or process rather than another asset or currency. The idea of siegniorage as backing came from a whitepaper from noted cryptographer Robert Sams, who puts forward the idea of a Federal Reserve coin (fedcoin) that could function as such. Smart contracts deployed on decentralized platforms could serve as an autonomous “backer” for these kinds of coins.

The Best Stablecoins Right Now

Not all stablecoins are created equal. With the number of stablecoins growing, it is good to have a grasp of the most useful and well anchored choices. Here are the best stablecoins right now:

1. Tether (USDT)

Tether
$1.00

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9 votes

So named because it “tethers” itself to the value of the USD, Tether is the most well-known stablecoin in the crypto world. It’s backed by gold, traditional currency and cash equivalents.

Tether is also known for its security and smooth integration with crypto to fiat platforms.

2.  True USD (TUSD)

TrueUSD
$1.0020

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2 votes

True USD (also represented as “TrueUSD”) is 100% backed by the U.S. dollar and is 1 of the most liquid stablecoins on the market.

The coin offers lower transaction fees than wire transfers of fiat currency and higher interest rates on stored balances.

The company behind True USD, TrustToken, also has stablecoins pegged to other major currencies — TrueAUD, TrueGBP and TrueHKD, to name a few.

3. Paxos Standard (PAX)

PAX Gold
$1,843.82

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1 vote

Paxos Standard aims to keep 1:1 parity with the U.S. dollar.

It was created as an answer to the Tether printing controversy, which saw Tether come under fire for an unverified claim that it held $1.8 billion with Deltec Bank & Trust Ltd to back its stablecoin.

4. USD Coin (USDC)

USD Coin
$1.0010

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4 votes

USD Coin is a stablecoin backed by Coinbase, the world’s biggest bitcoin broker and largest exchange holder of bitcoin.

5. Binance USD (BUSD)

BNB
$295.95

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Not to be outdone, crypto exchange Binance also released a Binance USD, which is pegged 1:1 to the U.S. dollar.

Trade or Invest in Cryptocurrency 

Every sophisticated crypto trading platform allows access to stablecoins alongside unpegged cryptocurrencies. Whether you are an active trader or a long term investor, having this tool available is a smart option for preserving wealth and stabilizing portfolio value. Here are a few of the best cryptocurrency exchanges to consider trading on:

get started securely through eToro’s website
Disclosure: eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.
Best For
Copy Trading
N/A
1 Minute Review

eToro, headquartered in Cyprus, England and Israel, has provided forex products and other CFD derivatives to retail clients since 2007. A major eToro plus is its social trading operations, including OpenBook, which allows new clients to copy trade the platform’s best performers. Its social trading features are top notch, but eToro loses points for its lack of tradable currency pairs and underwhelming research and customer service features

Best For
  • U.S. based cryptocurrency traders
  • Investors looking to CopyTrade other traders
  • Simple user interface
Pros
  • Several major cryptocurrencies and altcoins
  • Expansive network of social trading features
  • Large client base for new traders to imitate
Cons
  • Only 29 coins available
Invest In Crypto securely through Gemini Crypto’s website
Best For
New Investors
N/A
1 Minute Review

Gemini is a cryptocurrency exchange and custodian that offers investors access to over 100 coins and tokens. Founded in the US, Gemini is expanding globally, in particular into Europe and Asia. Offerings include both major cryptocurrency projects like Bitcoin and Ethereum, and smaller altcoins like Orchid and 0x.

Gemini is 1 of the only brokers with multiple platform options based on skill level. New investors will love the streamlined interface of Gemini’s mobile and web apps, while advanced investors might appreciate all the tools that come with ActiveTrader. 

In addition to a host of platform choices, Gemini users also have access to insured hot wallets to store tokens without worrying about digital asset theft. Learn more about what Gemini can do for you in our review.

Best For
  • New investors looking for a simple mobile and web app
  • Day traders looking to use technical analysis tools
  • Users looking for a 1-stop-shop to buy, sell and store all of their cryptos
Pros
  • Easy and quick signups — can get started in as little as a 5 minutes
  • Multitude of platforms to accommodate traders of all skill levels
  • Hot wallets include insurance to protect your from theft and hacking attempts
Cons
  • Charges both a commission and a convenience fee for users buying and selling through the desktop or mobile app
get started securely through BlockFi’s website
Best For
No or Low Fees
N/A
1 Minute Review

Maybe you think cryptocurrency is the future, or perhaps you were swept up in the initial waves of Bitcoin. BlockFi may be your next step if you’re ready to evolve as a crypto investor.

Whether you’re a native crypto user or curious enough to start investing, BlockFi seeks to bring institutional-grade financial products to crypto markets that often face restricted access. It strives to bring clients low-cost, simple applications designed to maximize the potential of crypto assets. Learn more in our BlockFi review.

Best For
  • Crypto native clients
  • Crypto curious clients
Pros
  • Mostly fee-free platform
  • Market-best interest rates
  • Earn interest, trade and borrow from a centralized hub using the BlockFi app
Cons
  • Mostly restricted to those with a base knowledge of cryptocurrency
  • No dedicated relationship with an investment advisor, so best for those who have a solid handle on crypto trading
earn free crypto securely through Coinbase’s website
Best For
Coinbase Learn
N/A
1 Minute Review

Coinbase is one of the Internet’s largest cryptocurrency trading platforms. From Bitcoin to Litecoin or Basic Attention Token to Chainlink, Coinbase makes it exceptionally simple to buy and sell major cryptocurrency pairs. 

You can even earn cryptocurrency rewards through Coinbase’s unique Coinbase Earn feature. More advanced traders will love the Coinbase Pro platform, which offers more order types and enhanced functionality.

Though Coinbase doesn’t offer the most affordable pricing or the lowest fees, its simple platform is easy enough for complete beginners to master in as little as a single trade.

Best For
  • New cryptocurrency traders
  • Cryptocurrency traders interested in major pairs
  • Cryptocurrency traders interested in a simple platform
Pros
  • Simple platform is easy to operate
  • Comprehensive mobile app mirrors desktop functionality
  • Coinbase Earn feature rewards you with crypto for learning about available coins
Cons
  • Higher fees than competitors
claim free Bitcoin securely through Voyager’s website
Disclosure: *Other fees may apply.
Best For
Mobile Traders
N/A
1 Minute Review

Voyager is a leading name in the sphere of cryptocurrency investing, giving you access to over 50 tokens and coins. Buy, sell and swap assets using Voyager Crypto’s simple mobile platform available as a free download for iOS and Android users. 

When you invest through Voyager, you’ll pay nothing in commissions, which is a major benefit when compared to other cryptocurrency brokers. Voyager is also one of the only brokers we’ve seen that allows users to earn interest on their crypto investments. 

Though the broker could do more to improve its customer service, it’s an excellent option for beginner investors and seasoned professionals alike.

Best For
  • Cryptocurrency investors looking for a wide selection of supported projects.
  • Investors who prefer mobile trading.
  • Anyone interested in earning interest on their crypto investments.
Pros
  • Simple, straightforward and intuitive mobile platform
  • Wealth of investment opportunities
  • Allows users to earn interest on select crypto investments
Cons
  • Only available for mobile users — no desktop platform
  • Limited routes to contact customer service team
get started securely through Dharma’s website
Best For
Best Rates
N/A
1 Minute Review

Dharma is a mobile application that makes interacting with decentralized applications on Ethereum’s network easier than ever before. You can fund your account with a debit card, unlike any other Ethereum Wallet. By seamlessly connecting your wallet to decentralized applications, you can start earning interest on your cryptocurrency within minutes. Sign up today to get access to trade over 70,000 altcoins.

Best For
  • Those looking to immediately purchase crypto with fiat (USD)
  • Those looking to purchase altcoins, memecoins, etc.
  • Those looking to immediate price action to a long list of tokens
Pros
  • Users can buy crypto directly from bank accounts
  • Only takes 5-10 minutes to begin buying crypto from fiat
  • No network fee trading on Polygon
Cons
  • Does not support some major tokens (Bitcoin, Litecoin, etc)

Advantages vs. Disadvantages

Like any form of crypto, stablecoins come with a unique set of advantages and disadvantages.

Advantages

  • Borderless. Stablecoins retain the power of all cryptocurrencies to move without regard to physical borders.
  • Transactional speed. Financial transactions on blockchains are objectively faster than traditional processes. Stablecoin transactions don’t have to wait on a 3rd party to verify the transfer, which means no one pays fees to any 3rd party either.
  • Transparency. Transactions using stablecoins are recorded on a public ledger that can be monitored by anyone, unlike fiat currency.

Disadvantages

  • Centralization. Unlike some cryptocurrencies, stablecoins are mostly created by centralized organizations that own the currency. Even DAI, a well-respected stablecoin that markets itself as decentralized, has faced scrutiny for its centralized organization.
  • Requires 3rd party audits. Stablecoins must be audited through 3rd parties that may create conflicts of interest to a decentralized, trustless or pseudonymous experience.
  • Less growth. Stablecoins don’t provide the potential for high ROIs to investors like unpegged cryptocurrencies.

Using Stability to Create Profitability

Most crypto investors would probably agree that having a stablecoin or 2 in your portfolio is a good way to diversify and protect yourself. If you are actively trading volatile alt coins, you can also use the stablecoin to move quickly out of falling assets and repurchase at a better price.

Will the stablecoin completely disrupt the crypto space? A complete takeover is unlikely because the purpose of the stablecoin and the unpegged cryptocurrency are 2 different things. 

A more likely scenario is that stablecoins serve as another financial vehicle in the digital transformation of money. Stablecoins can provide liquidity to markets of exchange, serve as a medium of exchange for risk averse investors and protect physical assets in the digital realm.

Frequently Asked Questions

Q

How is virtual currency treated for federal income tax purposes?

1
How is virtual currency treated for federal income tax purposes?
asked
A
1

Virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.

answered
Q

How many different cryptocurrencies exist?

1
How many different cryptocurrencies exist?
asked
A
1

There is no exact number of existing cryptocurrencies because the code of the cryptocurrency is an open source. This means anyone can create their own version of cryptocurrency by just using the code.

It’s estimated there more than 900 cryptocurrencies on the market.

answered
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