The key distinctions between altcoins and stablecoins are outlined.
What exactly is an altcoin?
An “altcoin” is any coin that is an alternative to Bitcoin or any cryptocurrency that is not Bitcoin (BTC). Altcoins account for a sizable portion of the cryptocurrency industry and are often meant to compete in functionality with the market leader, Bitcoin. Altcoins can be exchanged on an altcoin exchange or any major cryptocurrency exchange.
This article analyzes altcoins and stablecoins, their major distinctions, and their numerous applications. The article finishes with an analysis of six of the most popular stablecoins currently in circulation.
What is a stablecoin?
Stablecoins are altcoins that try to maintain price stability in the cryptocurrency market. A stablecoin seeks to maintain its value regardless of market volatility.
For example, the DAI stablecoin is fixed to the US dollar at $1. As a result, one DAI is always worth one dollar.
Technically, the market value of a stablecoin may be linked to any asset. As a result, there are no “best” stablecoins, despite the fact that having their value fixed to the US dollar has been conventional practice. It is also feasible to link a stablecoin to another cryptocurrency algorithmically. Tether (USDT) is often regarded as the first stablecoin, however there are other more.
Key distinctions between altcoins and stablecoins
The primary distinction between altcoins and stablecoins is their goal, and hence functionality. Because cryptocurrencies are vulnerable to price fluctuation extremes, stablecoins are designed to provide some stability as a hedge. It should be noted that stablecoins have a set quantity.
It is important to note that stablecoins have a set quantity of monetary reserves.
Altcoins differentiate themselves from Bitcoin by offering innovative and extra features, most notably access to decentralized finance (DeFi) instruments. These features are made available through smart contracts, which also allow for speedier transactions and reduced costs as compared to Bitcoin.
Altcoins, like Bitcoin, are prone to price fluctuation. By improving on Bitcoin’s initial consensus process, the greatest altcoins have the potential to acquire a large market share. As a result, early investors can expect large returns on investment (ROI).
The ROI on stablecoins is substantially lower. While stablecoin interest rates range between 5% and 20%, they aren’t the primary thing attracting traders. There are various advantages to using stablecoins, including convenience (users)
(Users do not need to on-ramp using cash) as well as the option to embed unique design changes into the crypto token.
While stablecoins are not as beneficial for investors, their constant price makes them essential for bitcoin transactions that rely on speed for profitability.
Is Ethereum a cryptocurrency?
Ether (ETH) is the most frequently utilized altcoin in terms of trading volume and total value locked (TVL). (ETH, the native token, runs on the Ethereum network.)
Some investors object to ETH being classed with other altcoins since Ethereum was the first blockchain to support smart contracts, which is why BTC and ETH are the world’s two most popular cryptocurrencies. Regardless, Ethereum is an altcoin by definition.
When should you hold altcoins versus stablecoins?
Because of their distinct use cases, storing both altcoins and stablecoins has advantages. An investor may opt to keep a portfolio that contains a larger proportion of altcoins than stablecoins, and vice versa. The portfolio allocation is determined by the investor’s objectives, risk tolerance, and market conditions.
When Should You Hold Altcoins?
Many cryptocurrency ventures are appearing on the market at an alarming rate. These cryptocurrencies are appealing to investors searching for the following characteristics:
Investments that are more inexpensive. The two biggest cryptocurrencies, Bitcoin and Ethereum, have become prohibitively costly. Other cryptocurrencies with a lesser market size, on the other hand, tend to be less expensive. Newer investors who are daunted by the bitcoin market can get started.
When should you hold altcoins versus stablecoins?
Because of their distinct use cases, storing both altcoins and stablecoins has advantages. An investor may opt to keep a portfolio with a larger percentage of altcoins vs stablecoins, and vice versa. The portfolio allocation is determined by the investor’s objectives and risk tolerance, as well as the situation of the market.
When to Hold Altcoins
Many cryptocurrency initiatives are appearing in the market at an alarming rate. These cryptocurrencies are appealing to investors that seek the following characteristics:
More inexpensive investments. Bitcoin and Ethereum, the two most popular cryptocurrencies, have become prohibitively costly. Other cryptocurrencies with a smaller market value, on the other hand, are less expensive. Newer investors who are scared by the space can begin their bitcoin journey.
Newer investors who are daunted by the industry may begin their bitcoin adventure in this more welcoming environment.
Profits might be substantial. Investing in fresh or emerging assets might result in immediate profits. Investors attracted to high potential returns must keep an eye on the most successful cryptocurrencies in order to buy regularly for the highest profits.
Long-term investments Short-term traders might consider investing in altcoins. Ether (ETH), Ripple (XRP), Solana (SOL), Litecoin (LTC), and Polygon are some of the cryptocurrencies to purchase in 2022. (MATIC).
Altcoins with a good reputation are traded on major cryptocurrency exchanges like Coinbase and Binance.
What exactly is Altcoin Season?
A popular belief is that cryptocurrencies perform better immediately following a Bitcoin spike. This is known as a “altcoin season.” This pattern is based on
When BTC becomes stagnant, it is time for altcoins to skyrocket.
An altcoin season occurs when the majority of the top 50 altcoins outperform Bitcoin during the previous 90 days. Other altcoin season indications are as follows:
Seasonal indications for altcoins
However, prices in the crypto world may shift quickly, and an altcoin season is difficult to predict.
When should you retain stablecoins?
Stablecoins are frequently employed as a hedge against inflation or to avoid cryptocurrency price swings. It is a good idea to keep stablecoins for trade and escrow.
Stablecoins are a popular choice among cryptocurrency exchanges and traders looking to exit a volatile cryptocurrency token without converting to money.
When cryptocurrencies encounter significant price fluctuations, Investors can convert portion of their holdings into stablecoins, which preserve the value of their capital. Following that, the trader can lock their stablecoins into a protocol for maximum yield. The trader may then reinvest the stablecoins in another cryptocurrency without incurring any losses.
Some margin protocols, like as dYdX, let users utilize stablecoins as collateral and perform margin transactions with up to 5x leverage. This allows crypto traders to open long and short positions straight from their crypto wallets, which offers a number of advantages, the most apparent of which is convenience.
MakerDAO’s DAI stablecoin, USD Coin (USDC), Binance USD (BUSD), and Terra USD are among the most popular stablecoins (UST).
Why are stablecoin rates of interest so steep?
Stablecoin demand has regularly outpaced supply. However, because DeFi protocols reduce economic rents, stablecoin interest rates are greater than those of fiat currencies. Furthermore, these rules must entice investors to supply liquidity, which explains why interest rates are so high. (As the TVL of these procedures grows, so should their rates.)
To entice new lenders, cryptocurrency exchanges that require stablecoin liquidity offer high interest rates. Trading platforms are prepared to provide consumers greater interest rates for stablecoins since they keep their fixed value.
Exchanges typically provide lower interest rates for other cryptocurrencies because to their significant price volatility, making them a riskier store of money. Interest rates on cryptocurrencies such as ETH range from 5% to 8%. In comparison, stablecoins frequently attract interest rates of 10% or higher.
How to Use Stablecoins to Protect Against Inflation
Inflation is a serious issue for fiat currencies. The strength of the US dollar, the euro, and even the Japanese yen is determined by fiscal policy decisions made by their respective governments and central banks.
The value of a country’s currency is also affected by popular trust. (“Fiat” literally means “It shall be” in Latin, as in the value of a nation’s currency being determined by its government.) When individuals lose trust in the government that issues the currency, it loses its value. Because many of the world’s fiat currencies suffer from high inflation, they have little value in comparison.
8%. Stablecoins, on the other hand, frequently attract interest rates of 10% or higher.
How to use stablecoins as an inflation hedge
Inflation is a significant issue for fiat currencies. The value of the US dollar, euro, or Japanese yen is determined by fiscal policy decisions made by their respective governments and central banks.
The worth of a country’s currency is partly determined by popular trust. (“Fiat” literally means “It shall be” in Latin, as in the value of a country’s currency being determined by its government.) If people lose trust in the government that issues the currency, it may become worthless. Many of the world’s fiat currencies have little value versus gold because of high inflation.
In comparison to stronger currencies
Stablecoins act as an inflation hedge in the following ways. Traditional banking systems may make converting a devalued local currency into a stable foreign currency challenging.
Stablecoins, on the other hand, let anybody with internet connection to buy a 1:1 fiat-equivalent asset from anywhere in the world. The tokens are meant to always equal the price of their allocated currency. As a result, a USD-based stablecoin always adjusts its peg to reflect the value of the US dollar.
These stablecoins can be retained during periods of extreme volatility and exchanged for cash as needed. As a result, stablecoins enable people to keep their purchasing power while imposing little constraints.
How stablecoins protect against cryptocurrency market volatility
In the following example, we will see how stablecoins may be used to hedge against crypto market volatility:
Assume ETH is worth $3,000. However, market swings cause the value to plummet to $2,000 every few days. To hedge against losses, traders might sell their Ether for a stablecoin around the peak of the market. As a result, they may buy 3,000 USDT for $1 apiece. This way, they can keep the $3,000 even if ETH falls down to $2000. At this time, investors might opt to reinvest.
Utilizing stablecoins to protect against cryptocurrency market volatility
Problems with Stablecoins
Are stablecoins backed by their USD equivalent in a physical vault? This has been a topic of discussion in the context of stablecoins. To ensure a $1 peg per coin,
Fiat-backed stablecoins require real-world financial reserves to underpin the digital asset.
To maintain openness, independent auditors of the money are essential. Cryptocurrencies, on the other hand, are mainly uncontrolled. Analysts feel that numerous notable stablecoin projects may lack the funding to guarantee the value of their tokens, hence fiat-pegged stablecoins have come under examination.
The Tether (USDT) dispute is a great example of experts asking if the stablecoin is backed by real-world assets stored someplace in a vault.
Tether’s website changed its claim that it was 100% backed by USD in March 2019, implying that it was only supported by cash assets. Tether is now “100% backed by reserves,” which might include everything from cash to non-cash assets, cash-equivalent assets, and loans, according to the website.
Tether altered course once more in April 2019, claiming to be backed by 74% “cash and cash equivalents.” After the New York Attorney General’s office began investigating the corporation’s allegations, the company legally agreed to pay a $18.5 million fine in February 2021. Tether provided an attestation of its collateral as part of its settlement with the New York Attorney General’s office.
According to the statistics they released, cash accounts for only 2.9% of the underlying assets. Nonetheless, this is not a professional audit, and these data have yet to be independently validated by a recognized auditing company.
Some investors and financiers choose USDC over USDT. USDC has been embraced by financial institutions like as Visa and Moneygram are two examples. Circle’s parent business, Circle, has also raised financing from significant firms like as Fidelity, Marshall Wace, and Bloomberg.
So even though USDC is likewise tied to the US dollar, it is more transparent than Tether, making it a more reliable asset-backed stablecoin for traders and investors. Circle publishes an independent verification of its dollar reserves once a month. Grant Thornton LLP, the sixth-largest accounting firm in the United States, has signed off on these attestations.
DAI, MakerDAO’s stablecoin
Volatility is reduced with debt-backed stablecoins like USDC, but the chance of entire value loss is increased. With algorithmic, crypto-backed stablecoins like DAI, this is less likely. Algorithmic stablecoins provide price stability by managing supply.
When the price of a token goes too low, algorithmic stablecoins purchase back tokens to reduce supply, establishing scarcity. When prices go too high, new tokens are produced for sale to replenish the supply.
The DAI stablecoin uses Ethereum smart contracts to automate this procedure. Using an algorithm is less expensive than keeping reserves. However, during periods of high market volatility, the algorithm may be unable to perform properly, causing the stablecoin’s price to fluctuate as well, resulting in arbitrage possibilities.
Key differences between altcoins and stablecoins
Although altcoins are valuable assets for bitcoin investors, their prices fluctuate dramatically. An cryptocurrency may provide a 10x return on investment, but it may also fall suddenly. Furthermore, the cryptocurrency market has grown oversaturated with low-quality enterprises.
Stablecoins, on the other hand, restrict losses but are not without debate. Many people are skeptical that prominent stablecoin initiatives can keep their declared value during moments of significant market volatility. Whether consumers should invest in altcoins or stablecoins is determined by a number of criteria, including their risk tolerance and the ultimate goal of their portfolio.
Advanced investors may also pick a mix of both to obtain a delta-neutral portfolio while minimizing losses.
Nonetheless, according to one estimate, only around 60% of USDC is backed by cash and cash equivalents. The remaining assets are a combination of short- and long-term financial instruments such bonds and US Treasury bills.