How Trade Stablecoins A Guide On How To Buy Stablecoins By CAPEX

Stablecoins, unlike Bitcoin and altcoins, are designed to retain the value of a physical asset. Like other cryptocurrencies, they can be used to transfer value while capitalizing on the benefits of blockchain. Stablecoin trading may not typically be linked to cryptocurrency trading, but it is possible to experience returns.

If you want to learn how trade stablecoins, we at CAPEX have prepared a guide for you.

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The stablecoin ecosystem

A stablecoin is a type of cryptocurrency whose value is tied to an external asset, like the US dollar or gold, that isn’t expected to fluctuate much in value (hence the name stablecoin). Bitcoin, Ethereum, Ripple and other cryptocurrencies have a number of benefits, including their use as a fast, cheap payment option.

One significant drawback, though, is that their prices can see significant fluctuations. They have a tendency to move up and down, sometimes seeing major movements in a matter of hours. While that is something positive for day trading strategies, like the ones you can use at CAPEX, and short-term investments,  these sudden and unexpected changes make it difficult for most people to use cryptocurrency as an investment vehicle.

What does it mean for investors?

Typically, most people want to know how much their money will be worth when they invest, both for their own security and their livelihood. On the other hand, while you may want to know how to buy stablecoins and then sell them, the process is the same as buying other cryptocurrencies.

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What is stablecoin trading?

Stablecoins, such as Tether (USDT), USD Coin (USDC) and others, are backed by assets that are independent of the cryptocurrency ecosystem. These assets are typically not affected by wild price swings, allowing traders to move their cryptocurrency assets to stablecoins when signals of volatility begin to appear. Traders can also move between trades quickly on platforms like ours at CAPEX, while transferring those assets to fiat currency can sometimes take days.

Traders and investors use stablecoins as a useful hedge in their trading portfolio. This trading strategy lowers the risk of purchasing cryptocurrencies, while protecting the value of the trader’s investments.

Stablecoin holding

Perhaps the easiest method of profiting from stablecoin trading is by holding them. The Gold Exchange, for example, has a precious metal-backed stablecoin. This means, by purchasing the stablecoin, that the trader is essentially holding gold. The coin’s value only fluctuates based on the price of the physical metal that backs it; buying low and selling high will yield a profit.

This doesn’t work for all stablecoins, especially those tied to the US dollar. USDT is one of these and, because fiat doesn’t fluctuate as much in price, there isn’t much room to generate a significant return.

Advantages of holding

Holding has a number of advantages, but only for certain traders. Those who aren’t concerned with fast or explosive returns will find stablecoin holding appealing. In addition, individuals who don’t want to store their assets in traditional financial institutions can turn to stablecoin holding as a strong alternative.

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Staking

Staking stablecoins is a great way to see a return from cryptocurrency investments. In staking, investors are “locking in” the value of the stablecoin to earn interest. It can be considered similar to how a traditional savings account works. It’s a newer concept, but one that many traders are now exploring.

In addition, investors can lend out their staked funds to others, enabling them to earn more in interest. They earn the traditional interest received for having staked the funds, and also interest paid by the borrower.

Advantages of staking

One of the biggest advantages to staking stablecoins is the ability to earn interest (often at distinct rates) twice. It allows the individual to have the confidence that the stablecoin value will remain relatively consistent, while earning a greater return on the holdings by staking and lending them.

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Day trading

Depending on the stablecoin, it’s possible to earn from day trading. Investing in an asset that ties to something more volatile, such as gold, silver or platinum, always has the capability to deliver returns. Trading directly in the underlying asset often implies paying significant fees, which makes day trading untenable. Although there are fees associated with stablecoin trading, these are a fraction of those of direct trading.

In addition, if you buy a volatile stablecoin at a low value, you will then be able to sell it at a higher price. The opposite is also true when you know how to short stablecoins. As long as you have the time to dedicate to the activity and learn, for example using a crypto demo account like the one you get at CAPEX, day trading can produce significant returns.

Advantages of day trading

Provided enough time can be allocated to tracking market movements, stablecoin day trading of precious metal-backed stablecoins can provide fast, substantial returns. Knowing that the stablecoin itself won’t see wild fluctuations offers an additional level of security.

 

Popular stablecoins available today

Tether

Tether (USDT) is one of the original stablecoins. It was launched in 2014 and is still the most popular today. USDT, which is pegged to the US dollar, is one of the most valuable cryptocurrencies overall by market capitalization.

USDT is mostly used to move money between exchanges in order to take advantage of trading opportunities when the price of a cryptocurrency on two exchanges is different. Traders capitalize on this discrepancy to gain a return. However, the stablecoin is also at the center of controversy. It is issued by Tether Ltd and questions have been raised about its assertion that the coin is backed by physical assets. Questions have also surfaced about its relationship with the Binance cryptocurrency exchange.

USD Coin

USD Coin (USDC) was launched in 2018 and is a stablecoin jointly managed by two cryptocurrency firms, Circle and Coinbase, through their Centre consortium. Like USDT, USDC is pegged to the US dollar, and it is currently the second-largest stablecoin by market capitalization.

Dai

Dai runs on the MakerDao protocol on the Ethereum blockchain. It was created in 2015 and is also pegged to the US dollar. However, in contrast to USDT and USDC, it is backed by Ether (ETH), one of the cryptocurrencies you can find at CAPEX and the token behind the Ethereum blockchain.

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Advantages and disadvantages of stablecoin trading

There are a number of advantages to stablecoin trading:

  • Stability. Stablecoins bring stability to cryptocurrency, keeping it free from the wild price swings that all digital currencies see at some point. Generally speaking, stablecoins offer more predictability and stability.
  • Multiple use cases. Stablecoins can be used for a number of investment purposes, including as a safe haven asset, for retail trading or cross-border payments and lending.
  • Anonymity. Not considering government-led stablecoins (often referred to as central bank digital currencies), stablecoins can be transferred between individuals without direct KYC (know your customer) checks and government intervention. It should be noted that this is changing, though, and more regulations are coming.
  • Fast transactions. Traders are quickly able to enter and exit the crypto trading market without losing any value of their altcoin holdings.
  • Risk management. Stablecoins offer traders a type of insurance to consider that are safer than riskier investments.

There are a few disadvantages to stablecoin trading that CAPEX wants traders to be aware of before getting started:

  • Central bank involvement. Stablecoins backed by fiat are subject to the financial stability of central banks relating to the fiat they issue and to which the stablecoin is linked.
  • Investment. Because stablecoins retail their value and don’t experience movement, they don’t make for the best investment vehicle for those looking to profit from market volatility.
  • Long-term viability. Skeptics have routinely doubted the ability of stablecoins to maintain their 1-to-1 link to the physical asset in the long run. Historically, pegged currencies of any kind have failed because they often have higher operational costs.
  • Trust. Because stablecoins are collateralized cryptocurrencies, they require traders to trust the entity that issues the tokens. Individuals must feel confident that there is enough collateral to back the coin.
  • Decentralization. Most stablecoin opponents argue that the coins are not decentralized, a major component of a proper cryptocurrency. They assert that, because fiat-backed stablecoins rely on the value of the currency as presented by the central bank, they are centrally controlled.

 

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Things to know about stablecoins

While stablecoins are designed to be “stable,” they are only as reliable as the asset to which they are pegged. Although the price of the US dollar is stable, for example, that might change, which would impact the price of any of the US dollar-pegged stablecoins, so it would be very similar to investing in other kinds of stable assets, like the ones you can find at CAPEX.

Know where are the stablecoin reserves stored

If the stablecoin reserves are stored with a financial institution or some other third party, outside the control of the issuer, there arises a counterparty risk vulnerability. This means that the issuer may not have the physical collateral to back the stablecoin. This is a problem Tether ran into years ago and it still has not provided a response.

Look for transparent stablecoin issuers

Many stablecoin issuers aren’t transparent about where they hold reserves or how much. This makes it difficult to know how risky the stablecoin is as an investment. By knowing where the assets are held, users are able to easily determine if the stablecoin is operating without a license. As has been seen already in cases in Brazil and Canada, financial regulators can seize assets of entities not holding proper licenses, even if those assets are linked to investors. By not revealing how much the stablecoin holds in assets, it’s impossible to know if the platform is solvent.

Cryptocurrencies were initially developed to replace intermediary companies that are trusted with a user’s money. Those intermediaries have inherent control over that money and can stop a transaction from occurring. Some stablecoins offer that capability, as well, which makes them more centralized than decentralized.

Conclusion – Trade crypto CFDs at CAPEX

Trading stablecoins is rarely going to be as profitable as trading other types of cryptocurrencies. However, it appeals to certain individuals, specifically those who want an alternative to bank and third-party savings options. There are ways to generate revenue from stablecoin trading, but, as with any investment opportunity, it depends on the goals of the individual. If you have general interest in cryptocurrencies, join CAPEX today and start trading the most popular ones.

How To Trade Stablecoins – FAQ

🤔What is a stablecoin?
🤷Are stablecoins safe?
🌀Are stablecoins securities?
🎯Are stablecoins a good investment?
⚡Are stablecoins taxable?