How do stablecoins work? Simply, they work by being attached to a known asset (Gold, Silver, etc..) or fiat currency (like the US Dollar). In theory, this will keep it from fluctuating as much as many non-backed cryptocurrencies do.

How do stablecoins work? Simply, they work by being attached to a known asset (Gold, Silver, etc..) or fiat currency (like the US Dollar). In theory, this will keep it from fluctuating as much as many non-backed cryptocurrencies do. For a more basic rundown of what a stable coin is:

Welcome to another Money Today. Today we’re talking about stablecoins, and what is a stablecoin? And that’s basically a crypto, generally ERC-20 token, which I think we should keep in mind. Pretty much all of the stablecoins are based on ERC-20 tokens, which really can tell you something about Ethereum in general, and why maybe it’s a good idea to keep an eye on it, maybe own some, but that’s for another video.

So, we’re talking about stablecoins and that’s supposed to be something that is tied to, well it’s tied to fiat currency which is very unstable right now, anyway, but let’s say tied to the dollar, let’s say, because that’s the most popular fiat currency. It can be tied to gold, it can be tied to even labor, or anything, it can be tied to whatever it is that we feel is stable at the time. You know what? Silver actually has been remarkably stable, even though maybe it doesn’t have the value it should, it’s been remarkably stable compared to other things lately.

But, let’s not digress, that’s what stablecoin is, it’s tied to something, and generally tied to the US dollar, all the most popular ones are right now. And basically, instead of coming into that fiat or out into gold, it’s basically like paper money, you know, except for it’s digital paper money, a digital account. So, you’re saying, hey, you know, in case, for a lot of traders, in case this starts going down, I want everything to go into this stablecoin until I can see that it’s going to go back up and I’ll put it back into that. You can use it for trading, what they call like a put, or just a way to make sure that if it keeps going up, great, I’ll keep it in the crypto, but if it starts going down, we’re going to liquidate into this fiat currency until I feel like we’re going to go back up again, it’s just a hedge.

The downside is that so many people are keeping this, their money, into these stablecoins, but how stable are they? They’re only as stable as what they’re backed up by. At least with the US dollar, it’s backed up by the US Government, or so they say. But there is some, at least mechanisms, behind that, some power behind that. If somebody was to say, hey, US dollars are no longer available, they’re no longer useful, the US Government can say, yes they are, and pretty much with the military might be able to enforce that policy. Maybe we’ve seen that already.

But, with a fiat currency, say, like a tether, which is just basically a company, a corporation which is involved in many different things, and some of them not so on the up and up, which you probably saw in my last video. Basically, I think there are two things that could really take down crypto, and one is regulation, that could easily wipe things out, just say hey, they’re illegal. Or, number two would be something like a stable coin, like a tether, going hey, sorry, we don’t have the money. There are decentralized stable coins, meaning you don’t have to trust them, all the money is verified by the blockchain.

The problem with those is that the liquidity isn’t there for the traders, and that’s what makes a tether so popular, because it has so much liquidity, all they got to do is instantly trade back and forth between cryptos, if they need to sell, they can immediately sell under USDT, if they need to buy, they can instantly buy. And yeah, that’s a huge advantage. If you go into, like, Coinbase also has a stable coin, USD, now that’s centralized, but it is FDIC insured. So, if you want that kind of stability, so you could either go with the decentralized type or you could go with the centralized, like Coinbase, or number three, you could go with something like a tether, which really, we don’t know, we don’t know where the money is, but it works and it’s fast.

So, I don’t know if I would keep my money there for any length of time, but if you’re only going back and forth into the market, maybe that makes sense. Other kinds of stable coins. So, those are the main ones that people are using for trading. And if you go to CoinMarketCap you can see there are quite a few of them high on the list of volume. And you can see, stablecoins are quite popular, you’ll see quite a few of them, say the top 50 on CoinMarketCap. So, there’s a lot of money going into the stable coins backed by fiat currency.

But what about other ones that are backed by, say, gold, or backed by something physical? You could back it by property, you could back it by just about anything. And if you bought a crypto, wouldn’t you prefer something that was actually backed by something physical? That’s an intriguing concept and we haven’t really gotten too many popular cryptocurrencies that are backed by physical assets, but I think that may be future. I think that may be exactly what we need to get people involved to a level where they feel very confident in the market, that no matter if it goes up or down they can just say hey, my crypto is backed by gold, so it really doesn’t matter if it goes up or down, it will always be worth the amount that gold is, or always be worth the amount that silver is.

I think ultimately that might be where we need to go, but in the meantime it’s not as easy to manipulate something when it’s backed by something physical, and there are a lot of sharks in this market right now, and I think we need to remember that. So, none of this if financial advice, of course, I’m not allowed to do that, but just something for you to think about. So, if you have any questions about stable coins or you want to know some more, feel free to hit me up, I would be happy to do another video on it.

Eric Phillips

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