With the price of Bitcoin and other cryptocurrencies fluctuating, some people are looking for a steadier option. Stablecoins have been gaining in popularity for a good reason. They offer a lot of benefits that other cryptocurrencies do not. These benefits have put them into the limelight and on the radar of many investors looking for stability. 

So, what are stablecoins? Stablecoins are cryptocurrencies pegged to a stable asset, which could be a financial instrument (stock), currency (US dollar), or commodity (gold). It means that they are designed to maintain a stable value, even when the prices of other cryptocurrencies are volatile. But considering one of the catches of cryptocurrencies is volatility, others are still sceptical about whether or not stablecoins are a good investment.

Why Stablecoin Is A Good Investment

Many factors determine whether a stablecoin is worth investing in. Here are some important ones to consider:

1. They Are Pegged On Stable Assets

Stablecoins get their stability from the asset it is pegged to. If the value of that asset increases, so does the stablecoin. For example, if a stablecoin is pegged to gold and gold prices go up, the stablecoin will also increase in value. However, if the asset’s value pegged to is declining, the stablecoin will also decrease. Therefore, it’s crucial to check the asset’s value before investing in a stablecoin, as this will play a significant role in the stability of the investment. 

Most stablecoins, such as USDT, are pegged to the US dollar because it is one of the most stable currencies in the world. It makes them a worthy investment because they are less likely to be as volatile as other cryptocurrencies. However, Swyftx explains that you should be aware of some stable coins that depend on computer codes and market forces to maintain their value. These are more volatile and should be watched carefully before investing. For example, when LUNA faced a turbulent market, its price dropped significantly.

2. They Are A Good Source Of Passive Income

Investing in stablecoins is a great way to generate passive income. Many crypto exchanges offer predictable interest rates of between 3% to 20% annually. It is a great way to make a return on your investment without having to do much work. If you are into a long-term investment, stablecoins are the best option because you’ll be sure of earning more than what you put in. 

Additionally, you can earn passive income through staking stablecoins. It is where you lock up your coins for a certain period to help the network operate smoothly, and in return, you are rewarded with more coins.  

3. They Are A Store Of Value

When the market is crashing, and other cryptocurrencies are losing value, stablecoins maintain their value or even increase in some cases. This characteristic makes them a good store of value, especially in economic uncertainty. As fiat currencies back most stablecoins, it’s easy to predict how much they are worth. For example, if a stablecoin is backed by the US dollar and the US economy is doing well, likely, the stablecoin will also increase in value. 

They are also easy to cash out as many exchanges require you to change your cryptocurrencies to stablecoins before converting them to fiat currencies. This fact increases the demand for stablecoins, which drives up the price.

Risks Of Investing In Stablecoins 

Even though stablecoins offer many benefits, there are also some risks you have to be aware of before investing.

1. They Are Not Fully Decentralised

Most stablecoins are not fully decentralized because they are pegged to a major asset. It means that if the asset crashes, the stablecoin will also crash. For example, if the US dollar crashes, USDT will also crash. This is a big risk when investing in stablecoins, as it could result in major losses.

2. They Are Not Regulated

Government or financial institutions don’t regulate stablecoins. It means that there is no guarantee that they will maintain their value. Even though a fiat currency may back a stablecoin, the government does not regulate it. This is also a big risk to take as it could result in losses.

3. Algorithm Stablecoins Lacks Real Backing 

One of the major setbacks experienced in the stablecoin space is the LUNA crash of 2022. It happened since the coin’s value wasn’t backed up by anything real. It was solely based on market demand and computer code, which made it very volatile. 

As a result, many investors lost a lot of money when the price crashed. Hence, investing in stablecoins is risky as there is no guarantee that they will maintain their value.

Conclusion 

Stablecoins are a good investment for those looking for a less volatile cryptocurrency. They offer many benefits, such as being a good source of passive income and a store of value. However, there are also some risks before investing, such as the lack of regulation and decentralization. Ultimately, the choice is up to you, depending on how much risk you’re willing to take.