Pros and cons of investing in stablecoins
Since we’ve figured out what makes stablecoins stable, it’s time to access them as an investment type.
To begin with, let’s recall what stablecoins are.
Stablecoin is a digital asset backed by a more traditional financial investment tool. Thus, stablecoins can be pegged to any fiat currency, foreign exchange-traded commodities, precious or industrial metals.
These unique assets have a stable price. They behave somewhat like fiat money but maintain the mobility and utility of cryptocurrencies at the same time. ‘Stable’ crypto assets are highly valued by investors. Because of their relative stability, stablecoins also have more chances to comply with regulators.
Lately, the whole crypto industry has experienced a huge uplift. In February, the market amassed a total value of nearly $1.8 trillion. While the media spotlight is on Bitcoin that soared about 900% over the past year, many investors are flocking around less risky digital assets.
Since the beginning of 2020, the stablecoin market has seen an unprecedented boom as well. Its market cap has expanded by over eleven times. In total, the market grew from $5B in Q1 2020 to around $20.2B in Q3 2020. It was only a humble beginning, though. This March, the market was nearing $58B, driven by DeFi growth.
What makes stablecoins an attractive investment? They have a few positive characteristics:
- Minimal price volatility
- Fixed value redemption
- Long-term storage
- Lower risk degree
- Great market liquidity
- High transparency
- Blockchain technology benefits
- Asset safety
However, the main criticism of the concept is that stablecoins are not really decentralized. Their reliance on government-supported fiat and usage of intermediaries to store the collateral undermines the whole idea of virtual currencies.
Moreover, stablecoins won’t bring you any lucrative gains since their price consistently remains at the same level, at least, if you simply buy and hold them. However, if you leverage stablecoins for trading, staking, and providing liquidity, you may earn some neat money.
In addition, stablecoins have become a very convenient lending tool. Interest rates for this type of asset are higher than the savings rates you would get on traditional savings accounts because the perceived risk is higher. After all, cryptocurrencies remain in an unregulated and unpredictable sphere. Thus, if you deposit your stablecoins with loan providers that accept such assets, you may earn about 6%-10% on lending those deposits to traders.
The bottom line is that stablecoins are not a suitable investment for those who want to multiply their wealth quickly and receive significant gains. However, they present a simple way to keep your money safe and possibly earn some extra money. Stablecoins are also good for testing crypto waters before you dive deeper into digital asset trading. Hence, our verdict is you can diversify your portfolio with stablecoins, but not make them your one and only investment choice.