Stablecoins And Their Pros And Cons

Stablecoin is a great hedging tool for crypto traders. Before the era of stablecoin, crypto traders had to hedge directly on fiat-to-crypto exchange every time they thought Bitcoin price might crash in the next few days. However, this strategy was not very favourable, due to the high fees and the whales’ unwillingness to wait for days just for fiat withdrawal. So, when Tether was introduced to the world as a stablecoin, many whales started to use it immediately.

Nowadays, people are starting to use stablecoins even more, especially in the weeks around BTC halving that’s just around the corner. Anyway, in case you don’t know about BTC halving, you can learn more about it here. But, what are the exact pros and cons of stablecoins? And should you use it? Let’s analyze together.

Brief History Of Stablecoins

I won’t get into too much details here but basically the concept of stablecoin was popularized by Tether, the sub-company of Bitfinex. At the time, Tether had an idea to “eliminate” cryptocurrency’s volatility by pegging its token price into fiat currencies.

So, the plan is to let people deposit real US dollars to the company’s bank account and in return, they will get crypto tokens that are worth exactly the same with 1-to-1 valuation to the dollar deposits. The same users are also allowed to redeem their Tether tokens and get real USDs in their bank account (usually via wire transfer).

Many whales and day traders started using USDT (Tether tokens pegged to the US dollar) right away. They believe it’s much easier to buy and sell Bitcoin and altcoins through Tether because of cheaper fees and much faster “in and out” transactions.
After the rising popularity of USDT, other companies started to follow the same trend.

Nowadays we also have USDC, TUSD, PAX, BUSD, and DAI with 1-to-1 valuation to the US Dollar. Other stablecoins pegged to other fiat currencies are also starting to show up (such as IDRT which is pegged to Indonesian Rupiah or BKRW which is pegged to Korean Won).

For your information, not all of these stablecoins use the same mechanism. For example, DAI uses an algorithm instead of fiat deposit/withdrawal mechanism to stabilize their price to the dollar.

If you are into stablecoins, keep in mind that they are usually available in the form of ERC-20. To save your ERC-20 stablecoins, you might want to learn more about Ethereum wallets in this article, as you can save ERC-20 tokens within your Ethereum wallet.

Pros

What are the biggest advantages of using USDT or PAX or USDC? Well, as mentioned above, the biggest advantage of stablecoin is the ability to go “in and out” instantly. Before the era of stablecoins, traders were forced to sell the real US Dollar every time they wanted to take profit from their Bitcoin trading. This method was considered inefficient due to the loss of time needed to process USD withdrawals to bank accounts.

Nowadays, people can just sell their BTC or altcoins to stablecoins and buy back later when they feel there’s another opportunity. Not only that, but traders can also move stablecoins easily from one crypto exchange to another. For example, if you want to move your crypto money from crypto exchange A to crypto exchange B without the need to worry about crypto price volatility, you can easily do so with stablecoins.

Another advantage of stablecoins is that they can be used as an alternative for cash withdrawal. Paxos and Circle enable this feature for PAX and USDC tokens. That means, you can just send your PAX tokens to Paxos (which is the PAX token issuer) and they will send your dollars to your bank account via wire transfer. This method might not be convenient if you don’t want to wait for several business days but at least you have an alternative in case you encounter some issues with your fiat on/off ramp in your country.

Cons

Of course, there are also cons of stablecoins. First and foremost, bigger stablecoins (e.g. USDT, USDC, and PAX) are all centralized in the hands of private companies. PAX, for example, is issued by Paxos. So, even though cryptocurrencies are meant to be “decentralized”, these stablecoins are not. If the stablecoin company has some financial problems, there’s always a risk that the withdrawal process will become increasingly difficult over time.

Not only that, their token redeem processes are also heavily dependent on their partnering banks (and usually they use smaller banks for this). You might want to be careful with these stablecoins once people start to request mass token redemptions.

Final Thoughts

Stablecoins still present some risks because they are still a very young industry with an unpredictable future. That being said, stablecoins’ popularity keeps growing and there are more and more people nowadays who put their trust in these stablecoins’ issuers. As of now, it looks like stablecoins present an ideal opportunity to hedge against Bitcoin’s price volatility because they offer flexibility that real dollars in the banking system couldn’t.