Stablecoins
The popularity of cryptocurrencies has exploded over the years. Today, leading cryptos, such as Bitcoin, Ethereum and Ripple experience significant volatility. Thus, stablecoins have emerged as a solution to tackle these price fluctuations. This review will explain how stablecoins work, the different types, pros and cons, plus how you can start trading these alternative currencies.
Cryptocurrency Brokers
#1 - AvaTrade
Why We Chose AvaTrade
Regulated in five continents, AvaTrade offers a secure way to access crypto markets. There's a great range of digital currencies including Bitcoin, Ethereum and Ripple, plus a crypto index. You can access competitive crypto spreads in the broker's wide choice of platforms as well as 1:2 leverage.
"AvaTrade offers the full package for short-term traders. There is powerful charting software, reliable execution, transparent fees, and fast account opening with a low minimum deposit."
- DayTrading Review Team
- Coins: BCH, BTC, BTG, ETH, LTC, XRP, EOS, DASH
- Crypto Mining: No
- Auto Market Maker: No
- Crypto Spread: BTC <1%, ETH 2%
- Crypto Lending: No
- Crypto Staking: No
- Platforms: WebTrader, AvaTradeGO, AvaOptions, MT4, MT5, AlgoTrader, TradingCentral, DupliTrade
- Regulator: ASIC, CySEC, FSCA, ISA, CBol, FSA, FSRA, BVI, ADGM
About AvaTrade
AvaTrade is a leading forex and CFD broker, established in 2006 and regulated across 9 jurisdictions. Over 400,000 users have signed up with the broker which processes over 2 million trades each month. The firm offers multiple trading platforms, including MT4, MT5, and a proprietary WebTrader. 1250+ financial instruments are available for day trading, alongside a comprehensive education center and multilingual customer support.
Pros
- The broker offers reliable 24/5 multilingual customer support with fast response times during testing
- AvaTrade is a heavily regulated and trustworthy broker with licenses from the ASIC, CySEC and more
- There's a great range of fee-free deposit methods, including bank wire, credit cards and popular e-wallets like Skrill
Cons
- There is no ECN account with raw spreads
- Traders from the US are not accepted
- A high $2000 minimum investment is required to use DupliTrade, which will be out of reach for many beginners
#2 - eToro
Why We Chose eToro
eToro leads the way in cryptocurrency trading, offering competitive spreads and a fixed 1% commission, plus their own wallet service. The broker offers a vast list of 95+ tokens which is continually being updated. Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more
"eToro's social trading platform leads the pack with a terrific user experience and active community chat that can help beginners find opportunities. There are also competitive fees on thousands of CFDs and real stocks, plus excellent rewards for experienced strategy providers."
- DayTrading Review Team
- Coins: BTC, ETH, BCH, XRP, DASH, LTC, ETC, API3, CRO, SKL, IMX, ADA, MIOTA, XLM, EOS, NEO, TRX, ZEC, BNB, XTZ, DOT, MKR, COMP, LINK, UNI, YFI, DOGE, AAVE, FIL, ALGO, ATOM, MANA, APE, LRC, ENJ, BICO, BAT, BNT, OGN, MATIC and many more
- Crypto Mining: No
- Auto Market Maker: No
- Crypto Spread: BTC 1%
- Crypto Lending: No
- Crypto Staking: Yes
- Platforms: eToro Web, CopyTrader, TradingCentral
- Minimum Deposit: $50
- Regulator: FCA, ASIC, CySEC, FSA, FSRA, MFSA
About eToro
eToro is a top-rated multi-asset platform which offers trading services in thousands of CFDs, stocks and cryptoassets. Launched in 2007, the brand has millions of active traders globally and is authorized by tier one regulators, including the FCA and CySEC. The brand is particularly popular for its comprehensive social trading platform. Cryptoasset investing is highly volatile and unregulated in the UK and some EU countries. No consumer protection. Tax on profits may apply. 76% of retail accounts lose money.
Pros
- Exciting investment portfolios are available covering traditional market trends as well as tech, crypto and more
- Top copy traders can receive annual payments up to 1.5% of assets under copy in the broker's Popular Investor Program
- The broker's services are great for beginners, with commission-free stock trading, a low minimum deposit and an unlimited demo
Cons
- Traders will face currency conversion fees for account denominations other than USD
- There is a $30 minimum withdrawal amount and a $5 fee, which will affect novices with low capital
- There are no guaranteed stop loss orders which would be a useful risk management feature for beginners
#3 - OANDA US
Why We Chose OANDA US
You can speculate on the world’s biggest cryptos by market cap. Commissions are lower than many peers starting at 0.25%. Through the broker’s partnership with Paxos, clients can spot trade cryptocurrencies on the itBit exchange through the OANDA native platform.
"OANDA remains an excellent broker for US day traders seeking a user-friendly platform with premium analysis tools and a straightforward joining process. OANDA is also heavily regulated with a very high trust score."
- DayTrading Review Team
- Coins: BTC, ETH, LTC, BCH, PAXG, LINK, UNI, AAVE
- Crypto Mining: No
- Auto Market Maker: No
- Crypto Spread: $100
- Crypto Lending: No
- Crypto Staking: No
- Platforms: OANDA Trade, MT4, TradingView, AutoChartist
- Minimum Deposit: $0
- Regulator: NFA, CFTC
About OANDA US
OANDA is a popular brand offering exceptional execution, low deposit requirements and advanced charting and trading platform features. The top-rated brand has over 25 years of experience and is regulated by trusted agencies, including the NFA/CFTC. Around the clock support is available for short-term traders, alongside flexible contract sizes and automated trade executions.
Pros
- Seasoned day traders can access industry-leading tools, including an MT4 premium upgrade and advanced charting provided by MotiveWave
- The proprietary OANDA web platform continues to deliver a highly competitive charting environment, including 65+ technical indicators powered by TradingView
- The broker offers a transparent pricing structure with no hidden charges
Cons
- It's a shame that customer support is not available on weekends
- There's only a small range of payment methods available, with no e-wallets supported
- The range of day trading markets is limited to forex and cryptos only
#4 - Eightcap
Why We Chose Eightcap
Eightcap’s crypto offering is best-in-class with 250+ crypto derivatives, surpassing that of almost every alternative. Testing also reveals Bitcoin spreads of 12 pips, coming in lower than most competitors, while it offers real-time trading ideas through the Crypto Crusher market scanner. Add in convenient deposits and withdrawals in digital currencies, and Eightcap offers the complete package for serious crypto traders.
"Eightcap delivers in every area for day traders with a growing selection of charting platforms and AI-powered tools. Now sporting 250+ crypto CFDs and the Crypto Crusher market scanner, it's also become a stand-out choice for crypto trading, winning our 'Best Crypto Broker' award two years in a row."
- DayTrading Review Team
- Coins: BTC, ETH, LTC, BCH, XRP, XMR, DSH, EOS, XLM, ADA, TRX, DOGE, BNB, DOT, MATIC, VET, AXS, NEO, SOL, UNI, AAVE, KSM, THETA, CAKE, SUSHI, ATOM, XTZ, SNX, COMP, FLOW, EGLD, PUNDIX, RAY, ZIL, QTUM, BAND, OMG, FIDA, BADGER, NEAR and many more
- Crypto Mining: No
- Auto Market Maker: No
- Crypto Spread: $12 (BTC)
- Crypto Lending: No
- Crypto Staking: No
- Platforms: MT4, MT5, TradingView
- Minimum Deposit: $100
- Regulator: ASIC, FCA, xCySEC, SCB
Pros
- Having excelled across all key areas for day traders, Eightcap outperformed more than 490 competitors to win our 'Best Overall Broker' award for 2024, also securing our 'Best Crypto Broker' title.
- Eightcap stands out with a selection of powerful trading tools, including MT4 and MT5, the innovative algorithmic trading platform Capitalise.ai, and more recently the 50-million strong social trading network TradingView.
- After bolstering its roster in 2021, Eightcap offers one of the most extensive selections of cryptocurrency CFDs in the market, with crypto/fiat pairs, crypto/crypto pairs, plus crypto indices for broader exposure to the market.
Cons
- Eightcap needs to continue bolstering its suite of instruments to match category leaders like Blackbull Markets with its 26,000+ assets, featuring a particularly weak selection of commodities.
- In spite of an increasing variety of tools, Eightcap doesn't offer industry favorites like Autochartist or Trading Central, which offer cutting-edge charting analytics, live news, and market insights for short-term traders.
- Despite a useful library of educational guides and e-books, Eightcap still trails IG’s comprehensive toolkit for aspiring traders with its dedicated IG Academy app and 18 course categories.
#5 - Uphold
Why We Chose Uphold
You can buy and sell 250+ crypto assets with fiat currencies or in crypto pairs using the straightforward mobile app or through Uphold's browser-based account homepage. This is significantly more than many rivals. You can also earn up to 16% APY by staking one or more out of 32 valid tokens, or send tokens to an external wallet.
"Uphold remains a top choice for crypto investors looking for a one-stop-shop solution to accessing the markets. There are over 250 tokens to buy, sell and trade through flexible platform options."
- DayTrading Review Team
- Coins: BTC, BTCO, AAVE, ALCX, DYDX, INH, XYO, API3, GHST, LSK, AUDIO, GLMR, NMR, CAKE, GODS, REQ, CHR, TRB, DAO, ROOK, XRP, ETH, BAT, ADA, ALGO, ATOM, AVAX, AXS, BCH, BAL, BTG, CSPR, COMP, CRV, DASH, DCR, DGB, DOGE, DOT, EGLD and many more
- Crypto Mining: No
- Auto Market Maker: No
- Crypto Spread: Up to 1.5%
- Crypto Lending: No
- Crypto Staking: Yes
- Platforms: Desktop Platform, Mobile App
- Minimum Deposit: $0
About Uphold
Uphold is a digital asset platform offering a range of services, from crypto trading and staking to payment cards that provides rewards and easy multi-currency payments. The company was established in 2015 and has enabled $4+ billion in transactions. Uphold is now active in 180+ countries and deals in 200+ crypto and fiat currencies.
Pros
- Fees are competitive based on tests, with 26 underlying platforms helping to source the best prices
- The proprietary app is extremely easy to use with a slick design and navigation
- Two-step authentication bolsters user security
Cons
- There is a 2.49% fee if you want to use debit or credit cards
- Uphold operates with limited regulatory oversight
- Customer service is slow based on tests, with limited contact options
Stablecoins Explained
The straightforward definition is that stablecoins are a type of cryptocurrency that attempts to offset volatility by pegging its value to an underlying asset such as fiat currencies, cryptos, exchange-traded commodities, or via an algorithmic peg. Commonly, stablecoins come in at a ratio of 1 coin = 1 USD. Decentralized finance (DeFi) companies are typically the organisations issuing these altcoins.
The purpose of stablecoins is to provide price stability so that crypto-assets maintain purchasing power despite a drop in value. For example, the value of 1 Bitcoin in 2017 rose from less than USD 1,000 to over USD 19,000 and dropped back to USD 8,000 by mid-2018. Significant intraday price swings are also common, making cryptos unsuitable for everyday use.
Stablecoins are backed by assets that are external to the crypto space. By having an asset that isn’t as affected by wild price swings, market participants can move their cryptos to stablecoins when signals of volatility are on the rise. Users can also move in and out of trades quickly while transferring assets to fiat money can take days.
How Stablecoins Work
Stablecoins maintain stability through collateralisation – with the value of the coin tied to an established asset like gold. This collateral is proof that the coin is worth the pegged amount. If the market does not have confidence in the value of the pegged coin, users will sell their coins and the price will crash. We’ve listed the common ways stablecoins are collateralised below.
Fiat-Backed Stablecoins
Fiat-backed stablecoins are those that are tied to a traditional currency with a 1:1 ratio. Commonly, stablecoins are backed by USD, though they can also be tied to the YEN, EURO or GBP. The top 3 stablecoins USDT, USDC and BUSD are good examples. Fiat backing offers the greatest certainty of a stablecoin’s value.
Typically, a stablecoin issuer will hold an amount of fiat currency and will issue the number of coins equivalent to the value of the fiat currencies in reserve. For example, an issuer will hold 1 million USD and distribute 1 million coins worth 1 USD each. This backing requires a level of trust in the issuer as it is difficult to prove that the issuer holds the amount of reserve it claims to. Risks have been mitigated through the publishing of audits, but this is not a comprehensive solution.
Tether’s USDT suffered criticism when sceptics claimed that the company did not have enough collateral to back the USDT in circulation. In 2019, a lawyer acting on behalf of Tether admitted that Tether was only 74% backed. Despite this, Tether is still popular today with the largest market share among stablecoins.
Commodity-Backed Stablecoins
Commodity-backed stablecoins are collateralised by physical assets. They can be pegged to precious metals such as gold and silver, or by oil and real estate. The most popular commodity used is gold with popular examples including Tether Gold (XAUT) and Paxos Gold (PAXG).
Gold-backed stablecoins have opened the doors to average individuals looking for global investments. Obtaining a secure location to hold gold and silver can be difficult and expensive. However, holders of gold-backed stablecoins can sell their tokens and take possession of the underlying gold at vaults throughout the UK and Switzerland. Such commodities can also appreciate in value, increasing the incentive to hold the asset.
Algorithmic Stablecoins
Algorithmic stablecoins don’t hold any assets as collateral. These stablecoins maintain their peg by algorithms and smart contracts that manipulate the coin supply in the market. The algorithmic peg increases or decreases the volume of stablecoins in circulation depending on the price of the coin.
If the price rises, an algorithm will try to maintain the 1:1 stablecoin vs fiat ratio by increasing the supply of tokens in circulation. This will alleviate the price pressure and maintain the coin’s value. If the price falls below the fiat currency it tracks, the algorithm will reduce the number of tokens in circulation.
A smart contract acts in a similar manner to a central bank’s monetary policy, detracting from the decentralised nature of cryptocurrencies. Some also argue that this method is questionable as it manipulates the money supply and doesn’t necessarily mean the peg will hold.
Crypto-Backed Stablecoins
Crypto-collateralised stablecoins are backed by another digital currency. Holders of these coins lock their cryptocurrency into a smart contract to obtain the token equal to the representative value. At a later date, the user pays stablecoins into the same contract to get their collateral back. One popular stablecoin using this structure is DAI.
As cryptocurrencies are volatile, companies tend to over-collateralise and hold more of the equivalent altcoin as a buffer against price fluctuations. Fortunately, this method is much easier to audit as a company’s collateral balance can be viewed on the blockchain.
Today you can also get hybrid stablecoins, which combine reserves of both fiat and crypto tokens as collateral, as well as utilising algorithmic pegs.
Benefits
- Stability – The key advantage is that they brings stability to cryptos, free from the wild swings that characterise most altcoins. At their core, they offer more predictability and stability.
- Multiple use cases – Stablecoins can be used for several investment purposes, from acting as a safe haven asset and retail trading to cross-border payments and lending.
- Anonymity – Outside of a central banking system, stablecoins can be passed between people without direct KYC checks and government intervention.
- Fast transactions – Traders can move in and out of the crypto market while retaining the value of altcoins. In comparison, converting crypto-assets into fiat currency may take days.
- Risk management – Stablecoins provide traders with a form of insurance to counteract other riskier investments.
Drawbacks
- Central banks – Fiat-backed stablecoins are subject to the financial stability and decisions of central banks relating to the traditional currency in question.
- Investment – The consistent stability does not make it the best investment vehicle if you’re looking to profit off significant market volatility. The value of a coin is unlikely to appreciate over time as it will equal 1 unit of the underlying asset.
- Long-term viability – Skeptics have questioned the ability to maintain a peg in the long run. Historically, pegged currencies have failed due to the cost of maintaining them i.e. the Chinese Yuan to US Dollar in 2005.
- Trust – As a collateralised cryptocurrency, it requires users to trust the entity issuing the tokens. Individuals need to have confidence that there is enough collateral to back the coin. Transparency in fiat-backed currencies is hard to achieve even with regular auditing, as demonstrated in the Tether example above.
- Decentralisation – Are stablecoins really decentralised? It could be argued that they’re not. Companies are still maintaining and manipulating the tokens issued, especially in the case of algorithmic pegs. And even with fiat-backed stablecoins, the value is heavily influenced by a central bank.
History Of Stablecoins
The popularity of cryptos stems from the introduction and growth of Bitcoin in 2008. Aside from significant profit potential arising from market volatility, cryptos can be traded 24/7 globally, compared to stocks, for example, that follow specific trading hours.
The underlying technology powering cryptocurrencies is blockchain. Blockchains are decentralised ecosystems, where no one person or group has control. They were initially designed to provide a financial system that is free from the control of central banks and governments.
Today, stablecoins are building confidence in the market and regularly feature in news headlines. However, banks are still wary of interacting with crypto exchanges due to the lack of oversight and the risks of money laundering and terrorist financing. And whilst cryptocurrencies are legal, there are ongoing discussions on global regulations and the implications on monetary policy. For example, FATF expressed to G20 finance ministers that risks should be mitigated immediately especially if cryptos have the potential for mass adoption. While the DeFi industry has evolved over the years, the future of stablecoins remains uncertain.
Global Evolution Of Stablecoins
The use cases for stablecoins vary around the world. In Asia, Japan is considered a forward-thinking country and adopter of cryptocurrencies. On the other hand, Hong Kong has turned to stablecoins to resist financial surveillance and internet censorship. In Europe, the ECB, FINMA and EU Commission published papers such as the MiCA proposal to regulate crypto assets, which are yet to be approved.
In the UK, HMT and Treasury Chancellor, Rishi Sunak, recently conducted a consultation on a regulatory approach to crypto assets. Central banks like the DNB and the BOE have also launched their own Central Bank Digital Currency (CBDC).
In Argentina, the peso faced devaluation and an annual inflation rate of over 30%. Thus, Argentines have turned to stablecoins like DAI to safeguard their money.
The USA has spearheaded much of the conversation around regulating stablecoins. The SEC, US Fed and OCC were the first entities to issue regulatory clarifications on stablecoins, while the US Treasury recently stated that banks may utilise stablecoins and blockchains for payment, opening up doors for trading stablecoins. With that said, the White House highlighted the importance of KYC verification for future regulatory frameworks.
In Canada, VersaBank aims to launch the first Canadian-dollar pegged VCAD stablecoin. Australia’s RBA has been sceptical of the use of stablecoins as a payment method, which is linked to the limited supply of Australian dollar-linked stablecoins.
On a global level, the G7 view is that no global stablecoin project should begin until regulatory and oversight challenges and risks have been addressed. So far, the FSB has published high-level recommendations to tackle this, while The World Bank aims to complete regulatory stablecoin frameworks by 2022.
In Arner’s 2020 paper called ‘Stablecoins: risks, potential and regulation’, he highlights that most legislation focuses on the role of stablecoins as a means of settlement for automated financial products. However, planned global stablecoins will also touch on other use cases such as digital payments, which regulatory responses must take into account.
How To Start Trading Stablecoins
Trading stablecoins can be done on participating exchange platforms. Popular options include Coinbase, Binance and Kraken. Each platform has a slightly different sign-up process, but usually, it requires basic contact details and a few minutes of your time.
Once registered, you will need to purchase stablecoins with a 1:1 ratio. This can be done with credit/debit cards i.e. Mastercard and Visa. Purchased coins will be displayed as an asset in your wallet. Once you’ve obtained tokens, you can convert stablecoins as often as you wish i.e. USDT vs BUSD. You can also trade against other popular cryptos like Ripple (XRP). Some stablecoins available on platforms are free, while others come with fees.
Binance and Coinbase both support crypto staking where traders can earn fixed interest or yield farming rewards. Often, users can migrate stablecoins from exchange platforms to hardware wallets i.e. ledger wallets.
There is also the option of transferring stablecoins into a crypto savings account. You typically won’t earn interest with a wallet but a crypto savings account can accrue interest over time. For example, coins on Crypto.com can earn up to 12% interest. On Coinbase, eligible US customers can earn 1.25% APY on USDC.
Top 5 Stablecoins In 2024
The following list contains some of the best stablecoins in 2024, based on data rankings by market capitalisation:
- Tether (USDT)
- USD Coin (USDC)
- Binance USD (BUSD)
- Multi-Collateral Dai (DAI)
- TerraUSD (UST)
Other well-known stablecoins include Paxos Standard’s PAX, True USD’s TUSD, Gemini’s GUSD, e-Money’s eUR and Stellar’s XLM. The top 10 best stablecoins in 2020 included DAI, USDK, SCHF, EURS and SAI. This list is far from exhaustive as new stablecoins are created regularly.
Final Word On Stablecoins
While stablecoins are still experiencing some growing pains around government acceptance and regulatory frameworks, they are an increasingly popular medium for investors. They bridge the world of cryptocurrency trading with fiat currencies and physical assets like gold. And with use cases extending beyond traditional online trading, these emerging coins also open the door to alternative investment opportunities in the crypto space.
FAQ
What Do Stablecoins Mean And Are They Cryptocurrencies?
A stablecoin is a type of cryptocurrency which pegs its value to an external asset in order to maintain price stability. Essentially, stablecoins are part of the quest for a low-volatility cryptocurrency. In comparison to other assets like stocks, cryptos can be traded 24/7, which is helping to heighten the popularity of assets like stablecoins.
Are Stablecoins Safe?
Stablecoins are a safer and more stable asset vs volatile cryptocurrencies like Bitcoin. However, not all emerging coins are safe. For example, fiat-backed stablecoins face issues around transparency. In the crypto network, fiat money reserves are commonly held in offshore shadow banks. These act like a bank but are not subject to financial regulation, thus do not have legitimate backing from the US Fed, for example.
Are Stablecoins Securities?
Depending on your country’s laws and regulations, stablecoins may be considered a security, so it’s worth checking their status in your jurisdiction. It’s also worth pointing out that most related legislation is still an ongoing conversation. For example, the US Treasury is still considering new regulations that will define stablecoins as a security.
Are Stablecoins A Good Investment?
How good an investment stablecoins are will depend on your objectives. Their purpose is to maintain stability so they won’t offer the same volatility and profit potential as day trading cryptos, for example. Instead, they’re typically considered safer assets used to mitigate risk over the longer term.
Are Stablecoins Taxable?
Just like other cryptos, stablecoins may be taxable depending on how they’re used. Sales or exchanges may need to be declared with capital gains taxes potentially applied. It’s worth seeking official tax advice in your jurisdiction before you start investing.
Are Stablecoins Stable?
Stablecoins are considered a stable form of digital currency with relatively low levels of volatility. They maintain their relative consistency through collateralisation whereby coins are pegged to fiat currencies, physical assets, other cryptos, or via an algorithmic peg.
How Do I Buy And Make Money From Stablecoins
You can buy stablecoins from exchanges and platforms like Coinbase, Binance or Kraken. You can purchase coins with a 1:1 ratio and certain platforms offer reward schemes where you can earn interest by holding the assets in a hardware wallet.