The Ultimate Guide To Investing In Stablecoins

guide investing in stablecoins stable cryptocurrency backed by fiat currency precious metals

Stablecoins are cryptocurrencies with an intention to manage volatility by basing themselves on a fiat currency like the U.S. Dollar or an asset like gold. 

While many investors are attracted by the large growth potentials of cryptocurrencies like Bitcoin or Ethereum, others are wary of the virtual currency world’s volatility. 

Volatility makes it hard for some to invest money in cryptocurrencies, but it also makes it difficult for some coins to be used in everyday transactions by the public. 

Stablecoins pegged to an underlying asset, like gold, as seen through, attempt to mitigate the issue of volatility by ensuring the coin is free from wild price swings. 

The Different Types Of Stablecoins 

1. Fiat-Collateralized

The first category of stable coins are fiat-collateralized coins. These coins maintain an underlying asset of a fiat currency like the U.S. dollar, or even other collateral like gold and silver. The U.S. Dollar and Euro back the vast majority of fiat-collateralized coins 

Reserves for legitimate fiat-collateralized coins are managed by an independent manager and are regularly audited to demonstrate to holders an underlying asset backs their coins. Tether (USDT) remains the most well-known fiat-collateralized stablecoin, albeit with a colorful history. 

2. Crypto-Collateralized

Crypto-collateralized stablecoins rely on a basket of cryptocurrencies as an underlying asset. Since digital currency is volatile, these coins are over-collateralized. Maintaining a larger number of tokens in reserve for a smaller amount of issued stablecoins protects the coin from price fluctuations in the base cryptocurrency. MakerDAO’s Dai is pegged against the U.S. Dollar and has crypto-assets as a reserve. 

3. Algorithmic 

Algorithmic stablecoins are a bit different than the other categories. These coins rely on a working mechanism to maintain a stable price. Basecoin relies on a consensus mechanism to govern when to increase or decrease supply. 

The concept of a working mechanism is similar to the actions taken by a central bank (like printing more paper notes) to maintain the value of the issued fiat currency. Many algorithmic stablecoins rely on smart contracts to facilitate decisions in an autonomous manner. 

Important Considerations When It Comes To Stablecoin Investment 

There are a wide variety of stablecoins on the market. All stablecoin crypto coins fall into the above three categories, but some projects are more reputable than others. 

Investors should do their due diligence into any stablecoin project before investing. Some do not have enough assets to back up the coin. This could pose a major issue as it could render the stablecoin worthless. Others are evasive about audits and do not communicate with buyers in an authentic manner. 

Any reputable stablecoin project will take steps to assure holders a verifiable and legitimate asset backs every coin. Many will conduct regular audits and prominently post results on the coin’s website for visitors to see. 

Some stablecoins backed by an asset like gold or silver will even set up live streams of bullion vaults for holders to view. These measures are to let holders know their investments are made into a stablecoin with sound backing. 

Do not invest money into projects that fail to provide extensive information about audits or reviews of assets by a reputable company. The risk is not worth it - even if the coin’s holders make bold promises about growth and protection against volatility. 

Stablecoins And Taxes 

Any stablecoin investor is going to have questions about tax implications. While guidelines about cryptocurrencies can be unclear from financial authorities, there are a few stipulations about stablecoins investors should take note of. 

Currently, no distinct tax rules are outlined for stablecoins. They are still treated as property by the U.S. Internal Revenue Service. Investors should be careful because slight fluctuations in the price of a stablecoin (in cents) might open up capital gains taxes. This means stablecoin buyers should keep track of their investments and understand what price points they are buying and selling at. 

The current tax classification for stablecoins has led to controversy in the cryptocurrency space. Some argue they should not be taxed since the gains and losses are immaterial. However, no further guidelines have been issued from U.S. financial authorities so far, which means stablecoin investors need to be prudent come tax time. 

Investing In Stablecoins 

Stablecoins are an enticing asset to add to any crypto portfolio. These cryptocurrencies can protect against volatility and allow users to expand their portfolio to the digital currency world.

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