Understanding Stablecoins in Your Crypto Portfolio

Cryptocurrency is famous for its exhilarating highs and vicious lows. For every success story, there is a narrative of losses that can even give goosebumps to the most experienced investor. It is that price volatility that is an obstacle for mass adoption of crypto and that hinders risk management for traders.

Meant to be the bridge between the traditional finance and the crypto world, the stablecoins represent stability in otherwise unpredictable markets. Understanding their role and strategy is no longer optional for anyone interested in diversifying their crypto holdings, but mandatory.

What Exactly is a Stablecoin?

Essentially, a stablecoin is a virtual currency that has its price fixed to another asset, typically a fiat currency like the U.S. Dollar. The goal is to guarantee price stability. For example, 1 USDT (Tether) attempts to always be worth $1. It is done through different mechanisms to guarantee that the coin is secured by real-world assets or regulated by algorithms. 

It can be likened to a virtual dollar that takes after the price stability of its real-world counterpart while still enjoying the perks of a virtual currency: it can be sent anywhere in the world 24/7 and all without the intervention of an ordinary bank.

• A stablecoin is a digital currency pegged to another asset such as the U.S. Dollar.
• Its value is supported by real assets or algorithmic mechanisms.

Not All Stablecoins Are Equal

While all of the stablecoins target price stability, they achieve it in different ways. It is important to be aware of the difference, for the unique mechanism of each stable coin is the defining factor of them. Below you will see three main types of stablecoins. To learn more, check out Quantify Crypto

The Role of Stablecoins

Stablecoins are also a strategic asset management tool. Veteran traders utilize them in several ways to improve their performance and reduce risk.

1. Hedging Against Volatility: It's their most popular use. If you expect a market crash of asset classes such as Bitcoin or Ethereum, you can easily sell them for a stablecoin such as USDC or USDT. That way, you can secure your profits and safeguard your capital from the crash without necessarily having to step out of the crypto space entirely by converting to fiat. You simply take your capital to the "sidelines" and wait for a favorable point of return.
   
   
2. A Safe Haven: During periods of intense market volatility, safe havens take the form of stablecoins. They are a trusty store of value that can be accessed at will. When that unexpected purchasing opportunity arises, having your capital in stablecoins enables you to capitalize on the opportunity straight away without waiting for a bank wire.
   
   
3. Yield Generation: DeFi has created new passive streams of revenue. Most of the platforms enable individuals to stake out their stablecoin or supply it as liquidity to trading pools for lucrative annual percentage yields (APYs) that tend to easily surpass those of regular savings accounts.
   
   
4. Fast, Low-Cost Arbitrage: For traders operating on multiple exchanges, stablecoins are essential. They can be quickly transferred from exchange to exchange much faster and at much less expense than is the case with a wire transfer. It also allows for arbitrage, during which a trader profits from minor price differentials of the same asset between exchanges.

To effectively use these strategies, you need a reliable cryptocurrency trading platform 

that has low fees and access to many different crypto pairs. Eurotrader has the robust infrastructure necessary for traders to swap between assets such as stablecoins. This means that traders can manage their portfolio in response to real-time market conditions.

Getting the Right Tools for the Job

Implementing an advanced trading strategy takes professional software. The top-performing traders use top-tier software that has advanced charting capabilities, numerous technical indicators and automating abilities. The MetaTrader 4 (MT4) has been the gold standard in the trading industry for all these reasons. It lets users do advanced technical analysis, backtest their strategy from historic data and use Expert Advisors (EAs). 

When trading in the volatile crypto market, it is absolutely necessary to have a solid and feature-rich platform. For those seeking to use this advanced software in their trading framework, a simple mt4 download from a reputable broker such as Eurotrader will grant access to the same software that professional traders use worldwide.

• MT4 has strong charts and tools to study the market.
• Traders can test their plans with market data.
• Expert Advisors (EAs) let the software trade for you.

FAQ

Q: Are stablecoins completely risk-free?

No. Though they are made to be reliable, they are not without risk. Every type of stablecoin has risks of its own, like the centralization risk for fiat-backed coins and algorithmic risk for others. It is important to select widely known and audited stablecoins.

Q: Why would I want to use a stablecoin over just holding US Dollars in my bank account?

It is all about access to the crypto economy and velocity. It may take days to transfer USD from a bank account to an exchange account. It only takes minutes to transfer a USDC token, so you can respond to market opportunities in real-time, 24/7.

Q: Can I lose money with stablecoins?

Yes. While rare for the most well known and used stablecoins, there is always the "de-pegging" risk, meaning the price of the coin falls below its $1 fixed value. Much higher is the risk with experimental or purely algorithmic stablecoins.

Q: What is the largest and most reliable stablecoin? 

Tether (USDT) and USD Coin (USDC) are the largest and most actively traded stablecoins. Both are backed by a fiat counterpart and are subject to regular audits of reserves and hence are popular among traders seeking consistency.

Q: How do I actually buy stablecoins?

You can purchase stablecoins on most major cryptocurrency exchanges using fiat money or by swapping them for other cryptocurrencies. Once bought you can keep them in your exchange wallet or transfer them to a personal crypto wallet.

Disclaimer

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