What is a stablecoin? The Ultimate Crypto Investor’s Guide

The black spot of cryptocurrencies is their volatility. What if there were cryptos whose price was stable? It is already the case with stablecoins. Operating via a blockchain, they stand out from other cryptocurrencies by their price stability compared to the asset to which they are backed. In this first guide, find out what a stablecoin is and how it works.

What is a stablecoin?

A stablecoin is a cryptocurrency collateralized to an asset to reflect the latter’s price on the blockchain. A stablecoin can be backed by a fiat currency (such as the US dollar or the euro), for example, and other assets, such as an exchange-traded product such as gold or a cryptocurrency. The ratio remains fixed. To better understand, if you have 1 stablecoin backed by 1 euro, your stablecoin will always be worth 1 euro. It is called 1:1 parity.

Can a low-volatility cryptocurrency be successful? Without a doubt, yes! The stablecoin market is particularly dynamic. Did you know that 2 cryptos out of the top 5 of the top Market Cap are stablecoins? Indeed, Tether and its $USDT token (pegged to the USD) comes in 3rd place, while the USD Coin and its $USDC token take 5th place. Tether was the first stable crypto to be launched in 2014. Now, there are dozens and dozens of stablecoin projects, which can be of several types.

READ MORE: Making Money with Bitcoin: Myths and Truths

How does a stablecoin work?

A so-called collateralized stablecoin indicates that the company that is at the origin of it has – theoretically, we will come back to this – the liquidity identical to the value issued in the token. For a stablecoin pegged to the USD with a 1:1 ratio, there must be 1 USD in reserve for each token issued. It is how the price can be balanced.

A collateralized stablecoin, for example, with the US dollar, works as follows:

  • If you buy $1 stablecoin, it will be minted
  • If you sell $1 stablecoin, it will be destroyed

Note that there are also so-called non-collateralized stablecoins, defined as being of the seigniorage type and involving algorithms to manage the volume of tokens according to supply and demand.

What about security? 

When you think about stability, it seems perfectly safe. Although stable crypto does not suffer the ups and downs of the market, variations have been noted during intense upheavals in prices in general, especially Bitcoin. Moreover, even if it experiences low volatility, a stablecoin is still subject to the seriousness of the organization that manages it. It is how Tether found itself, among other things, pinned on its insufficient reserve of dollars for its $USDT tokens. Of this fact,

Tether was ordered in October 2021 to pay $ 41 million to the Commodity Futures Trading Commission (CFTC). Before investing, as always in the ruthless world of cryptos, remember to check the project and its history carefully!

Why buy stablecoins?

While cryptocurrency exchanges allow buying and selling using fiat currencies, many do not offer this possibility. Let’s say you want to buy a crypto whose token is only for sale on a DEX that does not accept fiat currencies and has a pair with a stablecoin. Rather than buying Bitcoin on a platform to send it to the DEX in question and therefore pay high transaction fees, it will be much more economical to turn your fiat currency into a stablecoin.

Those attracted by DeFi, know that it is possible to practice yield farming with a stablecoin to earn passive income. In addition to offering you a whole universe at the level of cryptocurrencies, stablecoins also have another major asset, at least in France: their taxation! We explain this in the next point!

The taxation of cryptocurrencies with stablecoins in 2022

What taxation for a stablecoin? 

You must declare your capital gains in crypto when you file your tax return. The taxation of cryptos in France, at least at the beginning of 2022, requires the declaration of the profits (as well as losses) made in fiat currency. When you turn a crypto into a euro, you have to declare it. However, when you exchange crypto for another digital currency, you do not have to make a tax return.

So the thousand-dollar question is: should you declare your profits in cryptocurrency if you trade for stablecoins? No! If you have 1 BTC and sell it for euros, you must report it on your tax return. If you sell it for DAI ($DAI) or any other stablecoin, it remains a crypto/crypto exchange, which does not need to be traced back to the tax service.

In short:

  • A stablecoin is a cryptocurrency whose price is stable since it is backed by an asset with a defined ratio (1:1, for example)
  • There are stablecoins pegged to fiat currencies (US dollar, euro…) and cryptocurrencies or various assets (raw materials, precious resources…)
  • The stablecoin sector is experiencing strong growth, with USDT, USDC and BUSD leading.
  • Like any cryptocurrency, a stablecoin can lead to a loss of capital.

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