Stablecoins vs Cryptos: What’s Better?
Since the development of Bitcoin in 2009, cryptocurrencies have gone a long way. Thousands of digital products are available today, each with its value proposition and use case.
Price volatility has always been one of the most significant impediments to cryptocurrency acceptance. Bitcoin, for example, can fluctuate dramatically in value from month to month or even hour to hour. Because a currency is meant to be a unit of exchange and a store of value, it makes no sense for casual investors to trade with a currency that may be worth half of what it is today tomorrow. This is where stablecoins come into play.
This opens the door for a particular discussion that piques the interest of newcomers and experienced investors: the comparison of stablecoins and traditional cryptocurrencies.
Let’s look at the main differences between these two types of digital assets to help you decide which is best for you.
What are Stablecoins?
Stablecoins are cryptocurrencies intended to reduce price fluctuations by tying their value to a stable asset, usually a fiat currency such as the US dollar. Stablecoins are classified into three types:
- Fiat-collateralised: These stablecoins are backed by a fiat currency reserve, with each token reflecting a claim to an equivalent reserve amount. (e.g., Tether, USD Coin).
- Crypto-collateralised: These stablecoins are supported by a reserve of other cryptocurrencies, which is frequently over-collateralised to account for the price volatility of the collateral. (e.g., DAI).
- Non-collateralised/algorithmic: These stablecoins use intelligent contracts and algorithms to stabilise prices without collateral backing. (e.g., Ampleforth).
What are “Normal” Cryptos?
Normal or “non-stable”, or “volatile” cryptocurrencies are digital assets whose value is decided by market supply and demand dynamics. Decentralisation, security, and immutability are achieved through the use of blockchain technology. Bitcoin, Ethereum, and Litecoin are popular instances.
Comparison of Stablecoins vs Normal Cryptos
Price Stability
Stablecoins are intended to reduce price volatility, making them more appropriate for use as a store of value or medium of exchange. However, Web3 experts on this Bitcode Method review mention that the differentiation between stablecoins and normal cryptocurrencies is that they, on the other hand, are known for their price volatility, making them less practical for daily transactions but possibly more profitable as investments.
Use Cases
Because of their price stability, stablecoins are frequently used in dealing, remittance, and as a store of value. On the other hand, normal cryptocurrencies serve various functions, including investment, powering smart contracts, and facilitating decentralised apps.
Pros and Cons of Stablecoins
Advantages of Stablecoins
- Price stability: Less chance of loss as a result of price fluctuations.
- Reduced risk: Less vulnerability to market volatility.
- Adoption is made more accessible: More practical for daily transactions and easier to comprehend for newcomers.
Drawbacks of Stablecoins
- Concerns about centralisation include increased manipulation risk and singular points of failure.
- Regulatory scrutiny: There is a possibility of greater regulation and intervention.
- Potential value loss: The fundamental asset’s exposure to inflation.
Pros and Cons of Normal Cryptos
Advantages of Normal Crytpos
- Decentralisation reduces the likelihood of manipulation and central sites of failure.
- High-profit potential: Profitability is increased due to market instability.
- Broad adoption and innovation: Developing blockchain technology and fostering new uses.
Drawbacks of Stablecoins
- Volatility: A greater danger of loss as a result of price fluctuations.
- Regulatory ambiguity: The possibility of greater regulation and intervention.
- Concerns about the environment: Some cryptocurrencies consume a lot of electricity.
Regulation of Stablecoins and Cryptos
While the idea of a cryptocurrency backed by stable collateral is appealing in theory, there are currently no regulations that require stablecoin issuers to protect their reserves or keep liquidity. Users must believe that those reserves exist—and issuers have sometimes taken advantage of that trust.
Bitfinex and Tether were fined $18.5 million in February 2021 after it was found that they hid $850 million in worldwide losses from investors by falsely claiming that the supply of USDT was backed one-to-one by the US dollar at all times. Bitfinex was forced to cease trading with anyone in New York state and agree to increased transparency.
Stablecoins claim to be less volatile than their counterparts, but that assertion should always be taken with a grain of salt. Investing in stablecoins, like any other online financial venture, comes with its risks.
According to the SEC, stablecoins had a total market worth of $130 billion(Opens in a new window) as of November 2021. This expansion has prompted regulators to reconsider their position in the broader financial marketplace. Several US legislators support rules for stablecoin issuers similar to those for traditional banks and more frequent reserve audits.
How to Choose Between Stablecoins and Normal Cryptocurrencies
Determining your risk threshold
Comprehending your risk tolerance before investing in any digital asset is critical. Are you okay with the price volatility of regular cryptocurrencies, or do you favour the relative stability that stablecoins provide? Knowing your risk tolerance will allow you to make more informed choices about allocating your assets.
Evaluating your financial objectives
Different cryptocurrencies cater to different investment goals. Normal cryptocurrencies may be more appropriate for long-term growth and capital appreciation due to their possibility for higher returns. Stablecoins may be a better match if you prioritise stability and capital preservation.
Your User Scenario
The best cryptocurrency for you also relies on your specific use case. Stablecoins provide a dependable means of transferring value without significant price fluctuations if you are involved in trading or remittance. Normal cryptocurrencies, such as Ethereum or Cardano, may be more suitable if you are interested in decentralised applications or smart contracts.
The choice between stablecoins and traditional cryptocurrencies is not one-size-fits-all, as both types of digital assets provide unique benefits and address various needs. Stablecoins offer stability, reduced risk, and convenience for daily transactions, making them an appealing option for those who value capital preservation and consistent value. On the other hand, normal cryptocurrencies provide decentralisation, the potential for higher returns, and groundbreaking technological advancements, making them attractive to investors seeking long-term growth and inventive applications. Ultimately, the choice between stablecoins and normal cryptocurrencies depends on individual financial goals, risk tolerance, and specific use cases. By carefully considering these factors and staying informed about the ever-evolving cryptocurrency landscape, investors can make informed decisions that align with their objectives and help them confidently navigate the dynamic world of digital assets.
