Altcoins vs Stablecoins: Significant Differences Stated. The term “altcoin” refers to any cryptocurrency that is not Bitcoin (BTC) or any coin that is similar to Bitcoin but is not Bitcoin (BTC) $68,575. Much of the cryptocurrency industry is devoted to altcoins, often built to rival Bitcoin’s functionality. Any major cryptocurrency exchange, specifically an altcoin exchange, can trade altcoins. Learn about stablecoins and altcoins, how they differ, and what each is good for in this article. Finally, the paper finishes by analysing some of the most widely used stablecoins today.
What is a Stablecoin?
Stablecoins are actually another type of cryptocurrency that are used to bring more security, when it comes to prices, to the crypto market. The purpose of a stablecoin is to keep a fixed value despite market fluctuations. For example, the DAI stablecoin has a $1 peg to the USD. As a result, 1 DAI is always $1.
In theory, both the maximal and minimal value of a stablecoin can be connected to any item. The fact that a stablecoin is already tied to the dollar doesn’t imply that the “best” stablecoin is in existence. Stablecoins can be linked algorithmically to other cryptocurrencies as well. Although there are others too, Tether USDT $1.00 was the first stablecoin.
Altcoins vs Stablecoins Key Differences
Altcoins and stablecoins diverge, primarily through their purpose and hence their features. Stablecoins are designed to be a bulwark against violent price changes in the altcoin’s very nature and are accordingly treated by the market. Moreover, stablecoins are usually backed up by the same amount of fund as their total issuance.
Being alternatives to Bitcoin, altcoins add to it a host of new and vital functions, like the capability to utilize decentralized financial apps (DeFi) for example. To clarify, smart contracts aid in these aspects as they are less costly than the technology of bitcoin and facilitate faster transactions. For example, the variant that gave rise to BTC has the ability to witness high volatility. The best alternative cryptocurrencies want to replace the founder of Bitcoin with a consensus system and become the largest players in the industry. Nevertheless, these could be the first-ever projects that will bring about large returns to their investors.
Return on investment refers to the monetary benefits of a stablecoin that investors first issued to sellers, as well as the interest the token has gained. Although the interest rate is 5-20% on a stable coin, not only the rates make them appealing to traders. It has come up with improvements in design first and the fact that users are not always mandated to use it when dealing with their way of clearing crypto and cash out are one of the good things about stablecoin. The sea effect price fluctuations are so small that the body’s speed is the only thing that matters for those who want to use these prices for their proportions so much that this price is still good even if it is one fixed point.
Is Ethereum an Altcoin?
Based on trading volume and TVL, the top-rated alternative cryptocurrency is Ether (ETH), now standing at $3,866. Ethereum (ETH) is the native token and it is the network that runs it. Although Bitcoin and Ethereum (ETH) have become the most used digital currencies, some people see ETH more than altcoin. Ethereum was the first blockchain to implement smart contracts which is Bitcoin’s only key differentiator. Ethereum being an altcoin is a fact.
When to Hold Altcoins vs Stablecoins
Both altcoins and stablecoins being the two subcategories of cryptocurrencies that are mainly used for different purposes, the two kinds of coin might be mutually beneficial, so holding both can be quite an attractive option. A trader might choose to maintain a higher share of altcoins instead of stablecoins in their accounts or do the opposite/end up with stablecoins, although. The totally different objectives and risk aversion of the investor besides market conditions are the main reasons for the diversification of the holding.
When to Hold Altcoins
Many altcoin projects are launching in the market with surprising speed. These cryptocurrencies are attractive to investors who are looking for the following features:
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More affordable investments: Bitcoin and Ethereum, the two leading cryptocurrencies, have become prohibitively expensive. However, other cryptocurrencies with a smaller market cap tend to be more cost-friendly. Newer investors feeling intimidated by the space can begin their cryptocurrency journey with this friendlier approach.
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Potentially lucrative returns: Investing in new or rising assets can yield quick gains. Investors drawn to high potential returns must monitor the more successful altcoins to buy consistently for the best returns.
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Short-term investments: Altcoins is a good place for short-term traders to invest. Some of the altcoins to buy in 2022 are Ether ETH $3,866, Ripple XRP $0.53, Solana SOL $172, Litecoin LTC $84.04, and Polygon MATIC $0.74. Reputable altcoins are traded on major cryptocurrency trading platforms like Coinbase and Binance.
What is Altcoin Season?
Altcoins, according to a popular belief, tend to do better just after a Bitcoin boom. People are calling this the “altcoin season.” Assuming Bitcoin’s price stays flat, this tendency will cause altcoins to increase in value. When most of the top 50 altcoins have performed better than Bitcoin over the last 90 days, we say that it is an altcoin season.
When to Hold Stablecoins
Stablecoins are often used as a hedge against inflation or to avoid the price fluctuations of cryptocurrencies. Holding stablecoins for trading and escrow is a good strategy.
Trading
When the volatility of a cryptocurrency token creates a barrier to trading or if a trader doesn’t want to be involved in the transferring of such cryptocurrencies for fiat currencies, stablecoins become an option.
Stablecoins bring the investors the chance to diversify their portfolios and thus balance the inevitable part of volatile cryptocurrencies with stable parts. Then, in case the trader chooses to stake the DPROT he gets as a reward for operating the Nodes he can turn his stablecoins into very bright future profits. Traders with stablecoins can choose thus to vary their crypto portfolios without having to deal with unwanted losses.
Leverage
Stablecoins are usable as collateral for trading on margin (up to 5x leverage) with specific margin protocols like dYdX. A slight but definitely not worth missing out, one of the advantages of this feature is that it enables crypto traders to long or short directly from their wallets. Prominent stable coins include MakerDAO’s DAI, the $1.00 USD Coin (USDC), Binance USD (BUSD), and Terra USD (UST).
Why stablecoin Interest Rates are so High
Stablecoins are in high demand, and the supply often falls short. Interest rates on stablecoins are greater than fiat currencies because to the elimination of economic rents by DeFi protocols. The high interest rates are a result of the protocols’ need to encourage liquidity provision by investors. (The rates should fall in line with the growth of the TVL of these protocols.)
In order to entice new lenders, cryptocurrency exchanges that demand stablecoin liquidity offer high interest rates. Trading platforms are prepared to give stablecoin consumers greater interest rates because their value remains fixed. Because of the extreme price volatility of other altcoins, which makes them a riskier store of value, exchanges typically provide lower interest rates for them. You can earn interest rates on ETH and other cryptocurrencies between 5% and 8%. However, interest rates of 10% or higher are common for stablecoins.
How to Use Stablecoins as a Hedge Against Inflation
One of the big issues that come with fiat currencies is inflation. The value of many currencies, including the US dollar, the euro, and the yen, depend on the actions of the government and central bank with respect to fiscal policy.
Public confidence is the other one factor along that determines a currency’s value. (“Fiat” means “It shall be” in Latin, which refers to the fact that the government of a country is the one that sets the value of the currency.) When the people lose their trust in the government that issues their money. The value of that currency can fall to the ground very fast. Many countries around the globe utilize fiat currencies that often have high inflation rates, making them worthless when compared to stronger currencies. The stablecoins that help you with inflation are designed like this. Whereas the usual banking processes might decelerate the change of a falling national currency to a stable foreign currency.
Now stablecoins enable anyone, regardless of where they are, to buy an asset equal to fiat currency online if they are just with an internet connection. The tokens are designed to always replicate the value of the currency from which they originate. Thus, this is done by the adjustment of peg of USD to which the stablecoin is based, reflecting no matter how the value of USD changes. These stablecoins can be kept indefinitely and they can also be redeemed for cash whenever you want, even in times of excessive market fluctuations. Thus stablecoins are indeed a vehicle making people keep their buying power conveniently with the least limitations.
Issues with Stablecoins
Stablecoins have raised this question. For fiat-backed stablecoins, the actual backing of the digital asset in the form of financial reserves ensures a $1 peg per coin. For openness, the money must undergo audits by outside parties. However, cryptocurrency markets are still very much uncontrolled. Some experts worry that well-known stablecoin projects lack the capital to back their tokens, casting doubt on the viability of fiat-pegged stablecoins.
Tether (USDT)
One of the examples of stablecoin devaluation concerns the $1.00 Tether USDT’s backing with real assets in storage, which the specialists question. Tether supplemented its March 2019 website with information. That it was 100% tethered to USD which means it is solely backed up by cash assets.
In April 2019, Tether reiterated its previous statement, saying the token is 74 percent “cash and cash equivalents” back up. After that, in February 2021, the New York Attorney General office, which was probing. The company’s claims over ductile finances, charged it with a penalty for $18.5 million. Tether subsequently published an attestation of its collateral as part of doing away with the office of the New York Attorney General.
The statistics they have revealed show that cash makes up only 2.9% of the whole amount of assets. Still, a reputable auditing company has not yet verified these figures, which is quite far from conducting a formal audit.
USD Coin
USDC is preferred by only a few of the retail investors and traders. Visa and Moneygram are the names of the financial organizations that have adopted USDC in their payment network. Be aware of those who have made their mark: Fidelity, Marshall Wace, and Bloomberg are some of them, who had invested in Circle, the parent company.
Sure enough, USDC is also a currency that is pegged to the dollar, still investors and traders have no concerns for the fact that USDC is an asset-backed stablecoin since it is more transparent than Tether. Circle informs us by publishing a free of charge third-party verification every month of its cash reserves. The sixth-largest accounting firm in the US, Grant Thornton LLP, has also confirmed these statements.
Having examined all the facts, the results of the study show that only about 60% of USDC is really backed by cash and cash equivalents. The remaining balance of the assets you possess mainly comes from short- and long-term debts, such as bonds and U.S. Treasury bills.
MakerDAO’s DAI stablecoin
Stablecoins that are debt-supported, like USDC, demonstrate lower volatility but are exposed to a greater risk of complete value destruction. On the other hand, stablecoins like DAI that are linked to algorithms make it far less probable. Algorithmic stablecoins can keep their values stable by regulating the supply of their currency. In the case that their prices drop too low, algorithmic stablecoins will buy back. The tokens, thus, by this way they are causing the scarcity. On the other hand, the increase in additional tokens also takes place and is made available for buyers to buy in order to increase. The supply in and out that would exceed manually much.
This is realized by DAI stablecoin through the Ethereum smart contract execution. Rather than keeping a reserve, it is cheaper to use an algorithm. Nevertheless, the algorithm sometimes may fail to show a proper response to market volatility. They as it may lead to price of the stablecoin to be volatile and give a possibility to arbitrage.
Altcoins vs Stablecoins Key Takeaways
While altcoins are essential assets for cryptocurrency investors, they have very high volatility. An altcoin can increase tenfold in a short period, but it can also fall in value quickly just as well. Furthermore, the market for altcoins has overly been flooded with low-quality projects.
In contrast, stablecoins would have the benefit of stopping losses, if not controversial issues. Many doubt if the top stablecoin initiatives can sustain their promised value through the times of market volatility. The decision to purchase altcoins or stablecoins is influenced by various aspects, including. The level of risk the user is comfortable with and the overall purpose of the investment. Otherwise, experienced investors may prefer a combination of both to build a delta-neutral portfolio and thus lower the risk of loss.
FAQs
How do altcoins differ from stablecoins?
Altcoins are often more volatile and offer diverse functionalities, while stablecoins focus on maintaining a stable value.
Why are altcoins attractive to investors?
Altcoins are appealing due to their potential for high returns and affordability compared to major cryptocurrencies like Bitcoin.
When is it advantageous to hold stablecoins?
Stablecoins are ideal for hedging against volatility, trading, and using as collateral for leveraged trading.