Beginners guide for Stablecoins.

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Stablecoins are an essential tool for every crypto trader. Whether you are an investor, a trader or you just like to spend half of your paycheck on dogecoins it is important to hedge your bets in any case of unpredicted events. For example, you would rather like to have your coins in a stable store of value than crypto if US government is deciding whether on not to ban bitcoin. For such an erratic events crypto community has created a solution – stablecoins!

What is a stablecoin?

By the definition, stablecoin is a “Cryptographic asset that is optimized in the means of retaining its value during times of volatility”. In simple words – a stablecoin is like any other coin but with a fixed value. Issued on a blockchain, Stablecoins does not require third parties for a transaction and is fully transparent. They achieve the effect of stability by many different techniques such as backing the coin with stable assets, have a guaranteed right of exchange to other assets or mimicking equity. To really understand the fundamentals of a stablecoin it is best to analyze some practical examples of the most used stablecoins:

Tether: the colossus of stablecoins

In a view of the aforementioned three stablecoins, the most used stablecoins are backed by a fiat currency. Tether (USDT) which is the most used one of all three, is a stablecoin backing 1:1 with USD. It is first of its kind in the means of fiat backed stablecoin and has endured the most widespread adoption. Tether states in their website that it is secure, fully backed by USD, transparent and renounced by media giants such as WSJ, Coindesk and Cointelegraph. As all other cryptocurrencies, tether has blockchain technology behind it, but it is failing at decentralization. Tether Ltd. controls the emission of coins, which consequently has created negative stigma and fraud allegations by the crypto community.

The stablecoin controversy

During the December crypto-market bull run, tether faced wrong accusations of artificially creating tether coins without USD backing. The allegations went on for more than half a year. Tether Ltd. was even subpoenaed by the SEC for an investigation. However, the fraud accusations are now ceased and full tether backing log can be accessed at their website – tether.to. 

Speculating stablecoins

There is a phenomenon that would make Keynes`s head hurt very bad – stablecoin value increase and decrease! Stablecoins are perfect as for market indicators and speculatory instruments for trading. The reason is that due to the fact that they change value proportionally with the crypto-market increases and decreases. When the market is going up stablecoin value decreases, meaning that investors are selling to buy other crypto assets. When the market goes down, demand for stablecoin increases making stablecoin value increase by 0.01-0.03 USD. At first glance, the increase can seem insignificant but if properly leveraged can give immense gains with less risk than trading other crypto assets. Some exchanges have even listed USDT/USDC pairs for trading for speculatory purposes.

Price change of tether during period of one year. Source: CoinMarketCap.com

Tip by BestCoinInvestments professionals: How to keep your wealth stable without using stablecoins?

Aforementioned reasons of possible fraud, third-party trust et cetera can make you afraid of putting your valuable resources in stablecoins. Good news is that there is a solution – creating stability by yourself using leveraged bitcoin markets. The secret of storing stable value with bitcoin is putting exactly the right short position. Shorting bitcoin with 1x leverage will give you stable USD value while still keeping your value in bitcoin. For every 1% increase of bitcoin, you will lose some bitcoin but will retain the same value in USD as your assets price increases. If bitcoin falls in value you will gain more bitcoin filling the losses in your USD value.

Remember!

You must keep in mind that some bitcoin instruments such as inverse perpetual swap contracts have long:short funding rate every 24 hours which results in lost/gained funds depending on your position and overall market situation. Choose your financial instrument wisely minimizing the margin interest rates and funding rebates. This is not financial advice. Do your own research before using the aforementioned technique.

Source:

U.S. Regulators Subpoena Crypto Exchange Bitfinex, Tether, available on: https://www.bloomberg.com/news/articles/2018-01-30/crypto-exchange-bitfinex-tether-said-to-get-subpoenaed-by-cftc, accessed 26.01.2019.
Tether, available on:

https://tether.to/, accessed 26.01.2019.
Financial data of Tether, USDcoin, TrueUSD, available on: https://coinmarketcap.com, accessed 26.01.2019.

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