Stablecoin? We like the sound of that. A digital coin that is relatively stable is an attractive option as the volatility of most cryptocurrencies can often send us on a rollercoaster of emotions as investments fluctuate by the minute. Even if you like the adrenaline associated with cryptocurrency, putting some of your investments into a more stable option never hurts.
Fiat currency and gold do fluctuate very slightly, but nothing like cryptocurrency. Stablecoins bridge the gap between the two extremes. But with the recent crash of USDT and concerns around Tether, are stablecoins actually as stable as they are supposed to be?
What is a stablecoin?
A stablecoin is a form of digital currency that is directly pegged to another asset, most commonly a fiat currency like USD or a commodity like gold or real estate. The purpose of this is to provide a cryptocurrency that, in theory, maintains its value. Cryptocurrencies like Bitcoin or Ethereum fluctuate a lot on a daily basis. Still, the transaction speed, transaction cost, and accessibility make them more desirable than using fiat via a standard bank, where transactions are complicated and incur hefty fees.
Stablecoins combine the security, convenience and anonymous nature of cryptocurrency with the stability and trust of fiat currency. A stable cryptocurrency makes investing in crypto accessible to more diverse populations of people since many are unable to risk their finances to the volatility of cryptocurrency. Or at least that’s why they were developed. But before you start investing your hard-earned money into stablecoins, let’s take a deeper look into the world of stablecoins and determine if they are actually the investment opportunity you’ve been looking for.
Different types of stablecoins
1. Fiat-collateralized stablecoins
Fiat-collateralized stablecoins use fiat currency issued by a financial institution like a bank or another central issuer as collateral to issue stablecoins. The number of stablecoin tokens issued needs to be relative to the amount of fiat issued. If a financial institution issues 1 USD, it would be equal to 1 USDT or 1 TUSD. The reserves of these stablecoins are managed by independent trustees and regularly audited to ensure compliance.
2. Crypto-collateralized stablecoins
Crypto-collateralized stablecoins are backed by other cryptocurrencies. What that means is when you buy one of these tokens, you’re essentially exchanging Bitcoin for stablecoin tokens that are worth the same. Instead of using a financial institution as an issuer, crypto-collateralized stablecoins use something called “smart contracts.” These are programs which are stored on a blockchain that automate the execution of an agreement, and the agreement is the trade.
Unlike fiat-collateralized stablecoins, which need to be funded with an equal number of fiat, these stablecoins are overcollateralized to account for the inevitable price swings of crypto. That means more cryptocurrency coins are kept in reserve than the amount sold as stablecoins.
3. Non-collateralized/algorithmic stablecoins
These stablecoins have no reserves, neither fiat nor crypto. Instead, they use a functional mechanism that keeps the price stable. This mechanism raises or reduces the production of the stablecoin based on the demand, which is similar to how banks operate when they produce fiat. This was the case with TerraUSD and LUNA.
4. Commodity-backed stablecoins
Commodity-backed stablecoins use physical assets. Commodities include gold, real estate or oil to back the coins. Since the price of the commodities can change, there is more risk of this type of stablecoin losing value than fiat-collateralized.
Are stablecoins risky?
The name stablecoin can be misleading, especially now that we’ve seen the collapse of UST. Anyone involved in cryptocurrency has likely heard of the recent crash of the TerraUSD stablecoin. It’s an algorithmic stablecoin, which, as we mentioned above, is neither backed by fiat nor crypto. Instead, UST was backed through the Terra ecosystem (LUNA), and an algorithm would make new LUNA or burn existing LUNA to keep the price of TerraUSD to USD stable. The problem is that when UST started to trade lower, more LUNA were minted to make up for that, which caused the price to drop more and more.
Long story short, projects can fail, even stablecoin projects, which means there will always be some risk involved with investing in them. Additionally, there is still a lack of regulation around stablecoins. Without regulation, it can be hard to trust the systems and algorithms in place, which means every investment will come with a level of risk.
On top of that, the value of stablecoins is entirely dependent on the assets they are pegged to. Since the majority of stablecoins are pegged to fiat currencies, their value fluctuates based on inflation and the global economy, whereas typical cryptocurrencies are not subject to these factors. Another similarity that stablecoins have to fiat and which contributes to their risk, is the fact that they are centralized. The point of cryptocurrency was to eliminate centralization, but stablecoins are technically owned by the issuer who controls the supply by minting and burning tokens.
Since stable coins are dependent on reserves from their issuer, whether that’s fiat or crypto, there is a chance that these reserves may not actually be enough to cover the stable coin supply. If that information comes out, people will lose trust in the coin, which could drop the value. Still, we don’t want to discount stablecoins entirely just because of the situation with Tether. But it’s best to know the risks involved so you can make more calculated decisions about where to put your money.
The benefits of stablecoins
There are many benefits to buying in stablecoins. Here are some to consider. In the end, you have to invest only what you are comfortable with losing.
1. Low fees
Transaction fees when making bank transfers or making purchases with your credit card are becoming extortionate. This is especially evident when you’re sending money overseas or making an international purchase. From service fees to commissions, these fees can add up quickly. One of the reasons cryptocurrency has become so popular is due to the low transaction fees, and stablecoins have that same benefit. The transaction fees for sending stablecoins or making purchases with them are substantially less than paying through a bank or credit card.
2. Transaction speed
A bank transfer can take three business days, and international transfers can take up to two weeks, and sometimes more! Transactions that take place on a blockchain are nearly instant. That is because there are no waiting periods, and no clearing house. You’ll already be verified on whatever crypto exchange platform you choose to use, so your transaction doesn’t need to go through a verification process or any checks for money laundering. Your transaction is typically completed in a matter of minutes.
As the name suggests, stablecoins are, in general, relatively stable. Many people are interested in taking advantage of the benefits that cryptocurrency offers, especially when it comes to sending and receiving money. But they aren’t quite willing to risk their hard-earned funds to the volatility.
Stablecoins, like crypto, are not impacted by borders. The fees and time required to complete international transactions are dependent on banks, intermediaries and countries. Stablecoins, on the other hand, can be sent over the internet regardless of location because they take place on the blockchain. That means no intermediaries can censor or block them.
When a stablecoin transaction takes place on a public blockchain, that means that anyone can see each transaction. Central banks or other payment types do not provide this transparency. The access and transparency public blockchain transactions offer are significant benefits to many.
The most popular stablecoins
1. USDT (Tether)
USDT is hands down the most popular stable coin on the market and the most valuable. And it has been since 2014. It’s pegged to USD at a rate of 1:1 and has been one of the most effective ways to change your fiat into digital currency. Many different networks are minting USDT, including EOS and Ethereum, but with the large scale of this stablecoin comes some issues.
There are many hands in the project, with Tether, the issuer, affiliated with iFinex. iFixex is the parent company of Bitfinex, which is another cryptocurrency exchange. This has contributed to a lack of auditing and actually led to a subpoena from the Commodity Futures Trading Commission (CFTC) in 2017. They were also forced to pay an $18.5 million settlement after Bitfinex tried to cover up a massive shortfall with money borrowed from Tether.
2. TUSD (True USD)
True USD is a fiat-backed stable coin and one of the most popular ones available. You can trade TUSD on over 70 different global cryptocurrency exchanges. It’s an ERC-20 token, which is powered by the Ethereum blockchain. And like the majority of stablecoins, pegged to USD.
3. GUSD (Gemini Dollar)
As the first regulated stablecoin ever issued, Gemini Dollar was launched by the owners of Gemini, the popular cryptocurrency exchange. It’s pegged to the US Dollar with the backing funds held in the State Street Bank and Trust Company.
4. USDC (USD Coin)
Coinbase is another cryptocurrency exchange that jumped on the stablecoin bandwagon. They reward any users who hold USDC by offering them discounts on transaction fees for other crypto trades. USDC is pegged to USD at a rate of 1:1. You can also store this coin in any Ethereum-compatible external wallets.
5. BUSD (Binance USD)
Binance USD is a fiat collateralized stablecoin pegged to the US dollar and created as part of a partnership between the Binance and Paxos cryptocurrency exchanges.
6. DAI (Dai)
Dai is one example of a decentralized stablecoin, making it an exception to the typical rule. This makes it an attractive option for those looking for a stable investment option that isn’t under the control of a centralized issuer. Dai is still pegged to USD, but instead, the token is controlled by holders of MKR tokens (Maker Protocol) using Ethereum smart contracts. Unfortunately, there are still some issues with this system, which led to $8 million in losses a few years ago. That said, if this model can be optimized, then it will be game-changing in the world of stablecoins.
How to buy stablecoins in Canada?
Are you sold on stablecoins and ready to make the investment yourself? It’s pretty straightforward to buy stablecoins in Canada once you know how to do it. In this portion of the guide, we will break down exactly how to purchase stable coins yourself and the best ways to do so.
1. Pick a cryptocurrency exchange platform
If you don’t currently have an account on a cryptocurrency exchange platform, the first step is to find one you like. Many Canadian cryptocurrency platforms will enable you to buy stablecoins, so choosing the best one for you may depend on other factors. Some things to consider when choosing a cryptocurrency platform include:
- Transaction and platform fees
- Ease of use
- Security features
- Available assets
- Perks and rewards
Below, we will compare the best cryptocurrency exchange platforms for you to buy stable coins in Canada. So read on to find out which is the best option for you.
2. Register your account
Once you’ve chosen a crypto exchange that suits your needs, you will need to sign up and complete the verification process. Each platform has a different set of requirements to register, and some are more thorough than others. You’ll be required to provide identification, verify your email address and phone number and set up 2FA.
3. Fund your account and start trading
Once your account is set up, you’ll need to deposit funds so you can start trading. This is pretty standard for most Canadian cryptocurrency exchanges, although some allow you to purchase directly using a debit card. For Canadians, the best option is to use a Canadian exchange where you can deposit and withdraw Canadian Dollars. This helps you to save on transaction and trading fees that you’ll incur when using a US-based exchange.
The best cryptocurrency exchanges to buy stable coins for Canadians
Now that you know everything about stable coins, you’re ready to set up your account and get started. But first, you need to choose an exchange. Here are the best cryptocurrency exchanges to buy stable coins for Canadians and some important things to know about each one so you can make an educated decision.
Bitbuy is often considered the most secure and safe cryptocurrency platform in Canada. They are big on compliance and offer in-depth security coverage to ensure the safety of their users’ assets. You can start trading on Bitbuy with as little as $50 CAN, and trading fees range from about 0.1% to 0.2%.
Established in 2012, Coinbase is a US-based company that has become a preferred platform for those new to cryptocurrency thanks to its super easy-to-use design. It’s also one of the largest platforms in the world by trade volume, despite having relatively high fees compared to its competitors. You can expect to pay a purchase fee of 3.99%, a trading fee of 0.50%, and a spread of up to 2% for crypto-to-crypto transactions. On the upside, Coinbase stands out from the crowd with an abundance of learning resources available on their website, in addition to a program known as “learn and earn”.
Newton is one of Canada’s top cryptocurrency exchanges. Why? No trading fees! The platform was built specifically for Canadians, so you can easily fund your account with Canadian Dollars and use it to buy stablecoins and other cryptocurrencies. The only fee is technically the spread charged by Newton, which is the difference between what they buy the crypto for and what they sell it to you for. And honestly, it is still less than most platforms charge in fees.
Wealthsimple is one of Canadas largest financial management platforms. You can open a Wealthsimple account trade both stocks and crypto, including stablecoins, on the platform with no transaction fees. That said, they do charge an operation fee of 1.5%. Because of its variety of financial management tools, it’s an excellent option for those who want to manage all their assets in one place.
NDAX is another cryptocurrency platform solely for Canadian users, enabling you to fund your account with Canadian Dollars directly from your bank account. Once funded, you can start purchasing stablecoins and other forms of cryptocurrency. It’s easy to get set up on the platform, and there’s no minimum investment amount to get started, making it accessible for beginner traders who want to get their feet wet. NDAX supports stablecoins such as USDC and USDT.
Start buying stablecoins as a Canadian
Buying stablecoins as a Canadian has never been easier, with many of our national exchanges offering a variety of stablecoins to trade. As with any type of investment, it’s essential to do your research to ensure you feel comfortable with the level of risk associated with trading stablecoin. Although the TerraUSD crash and Tether lawsuits have caused some uncertainty, stablecoins are still less likely to fluctuate as dramatically as other cryptocurrencies while still providing you with the benefits of digital tokens.
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