How Stablecoins Are Bridging the Gap Between FX and Crypto
Stablecoins can provide some security during times of economic crisis. Here are two reasons why you should consider investing in stablecoins.
Crypto keeps growing, but the assumption has remained that it isn’t quite stable enough to be a safe investment. Many conservative investors still see crypto as a novelty that may one day pan out, but currently is too risky, while traditional markets are frequently deemed as more dependable and predictable. As the volatility of traditional markets continues to increase, the middle ground between them and crypto is starting to blur. Stablecoins have a unique potential to replace traditional currency to facilitate faster, more secure, easier, and cheaper cross-border payments than traditional FX.
What are stablecoins and why are they important
Stablecoins in their most basic form can be defined as a digital currency whose value is tied to fiat. These digital tokens are issued by financial entities and backed one-to-one by any global currency so that an individual can convert the stablecoins back to the same value in fiat.
Through the use of stablecoins, users can move value from the traditional banking system, like a bank account, into blockchain where they can take advantage of a global network to make frictionless cross-border and cross-currency payments. Many people are already capitalizing on the opportunities that stablecoins provide, and there are several reasons why.
Stablecoins are both easily accessible and easily traded
The last couple of years have seen FX brokers and traditional finance players flock to crypto. Paypal, JP Morgan, and the HK Central Bank have all announced intentions to produce their own digital currency or begin trading cryptocurrency in the past year. There is strong evidence that the $6.6 trillion dollar FX trading industry is leaping into the blockchain. While the KYC and verification processes in FX are very similar, stablecoins are not vulnerable to Foreign Exchange Intervention or market closures, as stablecoins can be traded 24/7 and update instantly. Stablecoins are easy to trade back — interchangeable, and most importantly, you as a trader own the coins themselves as long as you have access to your keys. (In contrast, most FX trading is done through an online broker who controls your holdings.)
Stablecoins used as a way to escape local volatility and inflation
Markets worldwide are struggling with political and economic volatility, and have seen massive growth in the popularity of fiat-backed stablecoins. Opting out of their local fiat in favor of a foreign currency allows individuals to hedge against their own economy with a potentially more stable one. Employing this same strategy with stablecoins can provide a number of benefits. Countries such as Argentina, Nigeria, Turkey, and Venezuela all have currencies that inflate rapidly year over year, making it difficult to trust the government’s ability to manage their currency. Stablecoins allow individuals to escape this volatility and access global markets in a way that may not have been possible before.
Risks associated with stablecoins
As with most things, there are risks to consider before transacting with stablecoins. Similar to other cryptocurrencies, stablecoins share the same risk of cybersecurity as well as regulatory uncertainty. Additionally, certain stablecoins are subject to more cybersecurity risks compared to traditional digital assets. They also potentially carry risks concerning how the assets backing the stablecoin are held and maintained. It is always recommended to do research and find reliable information on how collateral associated with a stablecoin is stored, and what safeguards are in place to verify a stablecoin’s value before starting to trade.
Overall, stablecoins provide an excellent middle ground between traditional markets and the crypto ecosystem. We have seen incredible growth in stablecoin adoption in the last few years and that is unlikely to stop in 2021.