For many new and seasoned cryptocurrency investors, it is important to note that the ecosystem is characterized by bulls and bears – trending upwards or downwards depending on several market factors such as public hype, supply, demand, and investor sentiments, among others. Therefore, to sustain the community of users who aim to build wealth and enjoy the freedom of money through investments in cryptocurrency, niche digital currencies have been developed by exchange platforms to hedge against such volatility, known as Stablecoins.
Stablecoins play a vital role in the crypto economy by introducing more liquidity into the ecosystem, allowing more digital asset trading on cryptocurrency exchanges. The different types of stablecoins are pegged based on their underlying collateral structure: fiat-backed, commodity-backed, crypto-backed, or algorithmic. For instance, on Binance, the Binance USD (BUSD), USD Tether (USDT), and USD Coin (USDC) are secured to the US dollar on a 1:1 basis, which means that the value of one BUSD for instance, is the same as one US dollar. As its name implies, its purpose is to provide price stability and serve as an alternative to the volatility of other cryptocurrencies, limiting their use cases for possible transactions.
For new investors and expert traders, the certainty of stablecoins makes them a good asset to invest in and hold on to, especially during bear markets. In the same way that traditional investors might choose to keep portions of their assets in low-risk instruments like treasury bonds or mutual funds, crypto investors also have the option of utilizing stablecoins; this provides a long-term store of value for players in the crypto space, especially when the market takes a prolonged downward turn.
For instance, Binance USD (BUSD), a U.S dollar-backed stable coin approved by the New York State Department of Financial Services (NYSDF) is one of the most trusted stablecoins available in the ecosystem. It has continued to maintain its position because it is backed and regulated by reserves contingent on regular attestation. With BUSD, investors are protected by a regulatory body that has painstakingly assessed the underlying foundation of the asset offered to new and experienced investors. In other words, investors can rely on coins like BUSD as low-risk instruments because of the strength of the regulation that goes into establishing the fiat-back reserve of each stablecoin.
Another key benefit of having a regulated stablecoin is that much like in the traditional market where investors can earn a fixed interest from a variety of investment products, crypto investors can also earn interest with stablecoins through lending. Investors can earn at a set interest rate from borrowers when they lend out their stablecoins. Also, a user can earn interest with stablecoins through staking, which involves holding funds in a cryptocurrency wallet to support the security and operations of a blockchain network for which they receive rewards.
A crucial role stablecoins have been able to play, due to their highly predictable stability, is the building out of some of the more recent applications in the crypto space, namely non-fungible tokens (NFTs) and decentralized finance (DeFi). Stablecoins have enabled investors to generate returns on their crypto assets in the DeFi market while alleviating the potential adverse effects of market volatility. Dollar-backed stablecoins like Binance USD (BUSD) are one of the preferred currencies of NFT marketplaces and storefronts. These digital currencies offer a convenient funding source for NFT enthusiasts. Thus, stablecoins are creating the foundations for blockchain and crypto applications.
As more people in Africa aim to take control of their finances and achieve financial freedom, stablecoins will remain a suitable alternative to fiat currencies, serving as an essential part of the crypto ecosystem. In addition, even though stablecoins are currently considered a niche crypto asset, they are well on their way to becoming a store of value and means of payment outside the crypto ecosystem. This is because to function effectively as a currency alternative, cryptocurrencies need to possess certain qualities such as liquidity, relatively low-price volatility, and the ability to be integrated with established financial institutions; all qualities the stablecoins currently possess.
Future regulation and compliance coupled with the collaboration with other fintech companies focusing on digital payments could potentially make stablecoins an option for retail payments as well as cross-border payments and remittances.
Interested in purchasing and investing in stablecoins? Get started today by downloading the Binance app here and trade from anywhere in the world. There are different options available for buying cryptocurrencies at Binance; through a fiat deposit or by using a Binance P2P.