In the market cap table, Tether slipped to the fifth position by the end of August from the third place at the beginning of the month. USD Coin has fallen to ninth in the m-cap ranking from the seventh spot.
However, say analysts, this does not necessarily mean that they are losing their relevance in the crypto market. Their popularity has taken a hit for now.
Stablecoins are a type of cryptocurrency linked to an asset like the US dollar. Their prices remain stable and are not volatile like other cryptos. Stablecoins stay pegged to the same value as that is their function, said Ishan Arora, Partner, Tykhe Block Venture, a crypto hedge fund.
They were primarily used to buy other cryptocurrencies, like bitcoin, because many cryptocurrency exchanges didn’t have access to traditional banking.
Initially, stablecoins were used as a hedge against the bear market, said Hitesh Malviya, founder, itsblockchain.com. “You can convert your positions into stable coins whenever you want to book profits or to wait to enter into a new position. Traders and investors also use stable coins for investing in DeFi, NFTs, token sales and trading altcoins.”
USD Coin and Tether are backed by the US dollar. Tether is one of the oldest stablecoin. It was launched by American cryptocurrency exchange bitfinex. USD Coin was launched and operated by Coinbase and others. Both cryptos hold more than 70 per cent share in the global stablecoin trading market. VISA started using USD Coin for transaction settlement in April this year.
The majority of the stablecoins use the US dollar as their benchmark asset, but many are also pegged to other fiat currencies like the euro and yen. “Since fiat currencies are pegged to an underlying asset, such as gold or forex reserves which act as collateral, their valuations remain free from wild swings of crypto currency markets,” said Darshan Bathija, Co-founder & CEO, Vauld.
The value of stablecoins is pegged against the US dollar and other foreign currencies, and it remains stable most of the time. “But there are some algorithm stable coins like frax share which derive its value based on reserved assets such as the US dollar, gold, or any other foreign currency,” added Malviya.
Should you invest in stablecoins?
According to market experts, stablecoins are one of the safest investments in crypto, and there are some staking pools that offer over 10 per cent annual interest when you stake your stablecoin in their pool.
“Some stablecoins also employ algorithms to manage supply and demand of the coin so what is in circulation matches what’s held in reserve,” added Bathija of Vauld.
Arora of Tykhe said countries might have their own digital currencies based on the stablecoin system. “Stablecoins are not an investment option. They are used to hedge your investment,” he added.