The cryptocurrency market has seen significant growth in recent years, and Latin America is no exception. Countries like Argentina, Venezuela, Brazil, and Mexico are experiencing a surge in crypto adoption, driven both by the pursuit of new investment opportunities and the need to safeguard against inflation and local currency volatility.
However, one of the biggest challenges for investors is the volatile nature of some of the most popular cryptocurrencies like bitcoin or ether. In this context, stablecoins have emerged as a reliable solution for those seeking stability.
In fact, if you’re wondering which cryptocurrency is best to buy to keep your investment safe, stablecoins might be the answer you’re looking for.
In this article, we’ll explore:
- What are stablecoins?
- The advantages of stablecoins.
- How to incorporate them into your investment portfolio to create better balance and diversify your wallet.
Stablecoins: What Are They and What Types Can You Find?
Stablecoins are cryptocurrencies whose value is pegged to relatively stable assets, such as fiat currencies like the US dollar or the euro, or even commodities like gold. The main goal of stablecoins is to offer the advantages of cryptocurrencies—fast, global, and decentralized transactions—without the volatility associated with other crypto assets like bitcoin or ether. This stability is why many people consider stablecoins the best cryptocurrency to invest in during times of uncertainty. To better understand what a stablecoin is and what are the benefits of having them in your investment portfolio, it’s important to explore the different types of stablecoins available:
Fiat & Liquid Asset-Backed Stablecoins
These are the most common type of stablecoins. Their value is pegged to some fiat currencies such as the US dollar (USDC, USDT), the euro (EUROC), and the Mexican peso (MXNB). This means their value maintains a 1:1 parity with the underlying currency, functioning as a digital equivalent of fiat, offering greater stability. The issuers of these stablecoins hold reserves at a minimum 1:1 ratio, consisting of liquid assets such as the underlying fiat currency, cash equivalents, precious metals, or even other cryptocurrencies, to ensure the value of the issued stablecoins. These reserves are regularly audited to guarantee their integrity.
Commodity-Backed Stablecoins
As the name suggests, these stablecoins are backed by commodities like gold, oil, or diamonds. While these assets can fluctuate in price, they tend to hold a more stable value during periods of inflation compared to others. These stablecoins provide an accessible way to invest in assets that are difficult to acquire physically. Each of them represents a specific amount of the physical commodity, which is securely stored by the issuer. For example, Pax Gold (PAXG) is a stablecoin backed by gold, with each unit representing the value of one fine troy ounce of gold. This means that the issuer of PAXG holds the same amount of fine troy ounces of gold in reserve as the units of PAXG issued.
Cryptocurrency-Backed Stablecoins
Cryptocurrency-backed stablecoins typically peg their value to that of a fiat currency—usually the US dollar (USD). They are collateralized by reserves in other cryptocurrencies to reduce dependence on fiat. This crypto collateral is managed by smart contracts, which ensure that the predefined backing ratio between the stablecoin and the collateral is maintained, guaranteeing at least the full value of the issued stablecoins. To strengthen their stability, these stablecoins are often over-collateralized (for example, at a 1:2 ratio), helping protect their value against cryptocurrency market volatility. One well-known stablecoin of this type is DAI, whose value is pegged to the USD but is backed by cryptocurrencies.
Algorithmic Stablecoins
These stablecoins aren’t backed by any asset but instead use automated algorithms to maintain price stability. These algorithms adjust the supply and demand of the stablecoin to align its value to a reference currency, usually the US dollar (USD). When the price of the stablecoin exceeds its target value, the protocol increases the supply by issuing more tokens to bring the price down. Conversely, if the stablecoin falls below the target value, the protocol decreases the supply by buying or burning tokens to raise the price. An example of this type of stablecoin is Ampleforth (AMPL), which, according to its issuers, “is a price-stable but supply volatile cryptocurrency that targets the CPI (Consumer Price Index)-adjusted dollar”.
The Top Stablecoins: USDT, USDC, and DAI
The three stablecoins currently at the top are USD Tether (USDT), USD Coin (USDC), and DAI, all of which are pegged to the value of the US dollar. Let’s take a look at their differences:
- USD Tether (USDT): A stablecoin developed by Tether, backed by a basket of assets that ensures its value stays aligned with the US dollar. This means that for every USDT in circulation, there are reserves in various types of assets and investments, such as corporate bonds, bitcoin, precious metals, and others, guaranteeing its stability.
- USD Coin (USDC): Developed by Coinbase and Circle, USDC is another stablecoin whose value remains equal to the US dollar. It’s backed by dollars in cash held in a bank, and a reserve fund with cash equivalents, such as Treasury bonds, to ensure its stability. USDC stands out for its rigorous auditing process, in which external entities verify that the reserves backing all USDC in circulation are fully accounted for.
- DAI: This is a decentralized stablecoin created by MakerDAO, whose value is also pegged to the US dollar. It is backed by cryptocurrencies—primarily ether (ETH)—and uses smart contracts to ensure that the collateral is at least 150% of the value of the issued DAI, in order to guarantee its stability. One of DAI’s key strengths is that it’s decentralized, meaning it isn’t controlled by a single entity or central government, which gives it greater autonomy.
These stablecoins are not only widely used but also among the 15 cryptocurrencies with the highest market cap.
Stablecoin Advantages
Now that you know better how stablecoins work, let’s take a look at the benefits they offer.
Liquidity and Access to Digital Dollars
Stablecoins stand out for their high liquidity, as they can easily be converted into fiat or other cryptocurrencies. In regions with currency restrictions such as Latin America, they provide a quick and easy way to acquire digital dollars without depending on traditional banks. This is why saving in stablecoins is becoming an increasingly popular option.
Passive Income
In addition to their stability, stablecoins can generate passive income through some crypto platforms. Exchanges like Bitso offer programs that provide returns of up to 4% annually simply by holding your stablecoins on the platform.
Low Risk
Compared to generally volatile cryptocurrencies like bitcoin or ether, stablecoins carry significantly less risk because they are backed by more stable assets or systems that ensure stability. This makes them an ideal choice for investors seeking a safe and steady option in the crypto ecosystem, whether they’re beginners exploring this space or experienced investors looking to keep part of their portfolio less exposed to volatility.
Fast and Low-Cost Transfers
Stablecoins enable fast and affordable international transfers without the need for intermediaries like banks or other centralized entities. This is especially beneficial in regions where remittance costs are high, such as Latin America, as sending stablecoins is much cheaper and more efficient.
How to Take Advantage of Stablecoins
Incorporating stablecoins into a crypto investment portfolio can be a smart way to manage risk exposure. However, how much of your investment you should allocate to stablecoins will depend on your risk tolerance and goals. For example, more conservative investors might put as much as 50% of their portfolio into stablecoins, while those with a higher risk tolerance might allocate only 15%.
These are some of the reasons many people invest in stablecoins:
- Protection against inflation in their own country and/or the depreciation of their local currency.
- Having liquidity to buy assets when the market is down.
- Keeping an emergency fund in crypto without worrying about large value fluctuations.
- Earning passive returns through programs like Bitso Earnings.
- Make cheaper and more efficient international transfers than through traditional banking systems.
- Some businesses even use them to pay salaries.
- Access to decentralized finance (DeFi) platforms.
Discover the World of Crypto with Bitso
Stablecoins are an effective solution for investing in cryptocurrencies, especially in regions like Latin America, where financial stability can be a challenge. They offer liquidity, passive income, low risk, and easy transfers, making them a valuable tool for diversifying portfolios. Additionally, they help reduce the impact of crypto market volatility and provide access to global opportunities.
Interested in investing in USDC, USDT, and DAI? Join Bitso today and earn up to 4% annual yield on some of your stablecoins. Access over 50 cryptocurrencies and diversify your portfolio on a secure and transparent platform. 🚀
The information provided is for reference only and does not constitute financial advice. Please note that past performance does not guarantee future results.
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