What are stablecoins?

Raphael Schön

By Raphael Schön

Advocates hope that stablecoins can become a global, fiat-free, digital cash built on four main features: price stability, scalability, privacy, and decentralization. But what exactly are stablecoins? How do they work?

Described by some as “the holy grail of cryptocurrency,” stablecoins have made headlines recently as a low-volatility alternative cryptocurrency. Advocates hope that stablecoins can become a global, fiat-free, digital cash built on four main features: price stability, scalability, privacy, and decentralization. But what exactly are stablecoins? How do they work? And why have they become so popular recently?

Since they try to hold the same value as a currency such as the U.S. dollar or the Euro, stablecoins combine the characteristics of fiat currencies with cryptocurrency’s innovative technological capabilities.

The basics

Unlike a cryptocurrency such as Bitcoin, a stablecoin’s main selling point is its inherent stability, as its name suggests. Bitcoin can be highly volatile, which makes it attractive to traders seeking an appreciative return on their investment. However, this underlying volatility can make it impractical as a daily medium of exchange.

Since they try to hold the same value as a currency such as the U.S. dollar or the Euro, stablecoins combine the characteristics of fiat currencies with cryptocurrency’s innovative technological capabilities.

Enter stablecoins. Although nearly none of them are able to have a 100% price correlation, they try to hold the value of the U.S. dollar (currency-backed) or gold (commodity-backed), a stablecoin carries far less volatility, marking them as a promising cryptocurrency for daily payments, among other things. In real world terms, buying your morning flat white with stablecoins at your local café becomes a far more predictable experience. With crypto’s characteristic unpredictability removed from the equation, the price you pay today is unlikely to change much in the future.

A surge in popularity

Stablecoins have become one of the hottest things in cryptocurrency lately, partially for their inherent promise. Many industry experts also believe that stablecoins will play a key role in the mainstream adoption of cryptocurrencies.

Despite the recent buzz, however, stablecoins have been around for a while and there are a number of them in circulation. While the exact mechanism behind which they operate varies both in approach and complexity (e.g. currency reserves versus crypto assets in reserve), stability remains their underlying logic and real-world value.

Bitpanda and stablecoins

We’re happy to announce that Bitpanda is expanding its offerings. We’ve introduced stablecoins as a new asset class, and Tether is the first of many stablecoin offerings to come from Bitpanda.

Buy Tether now

Raphael Schön

Raphael Schön