The first stablecoins were issued in 2014 in an attempt to combat the volatility associated with cryptos like Bitcoin. Today, the market capitalisation of these new digital currencies stands above £6.5 billion with Tether’s USDT leading the pack. Here we review stablecoins, with definitions explained and the respective merits and drawbacks detailed. We also explain how retail investors can start trading stablecoins.
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Reliable and affordable trading since 2009. Join over 900,000 others trading on 400+ CFD products over assets like forex, gold, indices, cryptocurrency and shares from 0.0 spreads through TradingView, MT4 or MT5. Vantage is ASIC regulated and client funds are segregated. Open an account in under 5 minutes.
Skilling are an exciting new brand, regulated in Europe and beyond, with a bespoke browser based platform, allowing seamless low cost trading across devices.
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BitMEX offer the largest market liquidity of any cryptocurrency exchange. The platform also offers ultra low trading costs and minimum deposit requirements.
BitMEX offer the largest market liquidity of any cryptocurrency exchange. The platform also offers ultra low trading costs and minimum deposit requirements.
Demo Account
Yes
Regulated By
Licensed in the Republic of Seychelles, company number 148707
MT4 Integration
No
Min. Deposit
0.001 BTC
Min. Trade
Varies upon the crypto traded and amount of leverage
TP Global FX offers a long list of popular financial assets with spreads from 0.1 pips. With a focus on innovation and transparency, they are a growing brand.
TP Global FX offers a long list of popular financial assets with spreads from 0.1 pips. With a focus on innovation and transparency, they are a growing brand.
Speculate on traditional and emerging financial markets via MT4, MT5 and cTrader. FXPrimus is multi-regulated and offers leverage up to 1:1000 alongside monthly promotions.
Speculate on traditional and emerging financial markets via MT4, MT5 and cTrader. FXPrimus is multi-regulated and offers leverage up to 1:1000 alongside monthly promotions.
NinjaTrader offer investors futures and forex trading. Use auto-trade algorithmic strategies and configure your own platform while trading with the lowest costs.
NinjaTrader offer investors futures and forex trading. Use auto-trade algorithmic strategies and configure your own platform while trading with the lowest costs.
Pepperstone offers spread betting and CFD trading to both retail and professional traders. Clients can trade FX, indices, commodities and shares on MT4, MT5 and cTrader platforms.
Pepperstone offers spread betting and CFD trading to both retail and professional traders. Clients can trade FX, indices, commodities and shares on MT4, MT5 and cTrader platforms.
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An investor with a Plus500 account can trade CFDs on underlying financial instruments such as Forex, Stocks, Commodities, Cryptocurrency (Availability subject to regulation), Options and Indices. With tight spreads and no commission, they are a leading global brand.
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Alpari offer forex, CFD and binary options trading across a big range of markets with low spreads and a range of account types that deliver for every level of trader from beginner to professional.
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Trading 212 Offer a truly mobile trading experience. With tight spreads and a huge range of markets, they offer a dynamic and detailed trading environment. Recent customer care issues have severely damaged the reputation of the brand.
Multi-Award winning broker. Specialising in Forex but also offering stocks and tight spreads on CFDs and Spread betting across a huge range of markets.
Multi-Award winning broker. Specialising in Forex but also offering stocks and tight spreads on CFDs and Spread betting across a huge range of markets.
Demo Account
Yes
Regulated By
CySec, DFSA, FCA, SCB, FSCA
MT4 Integration
Yes
Min. Deposit
$100
Min. Trade
0.01 Lots
Crypto
Yes
What Is A Stablecoin?
Stablecoins are digital currencies pegged to assets with low levels of volatility, such as fiat money like GBP, commodities like gold, or other cryptos like Ripple (XRP). They are essentially a hybrid coin that balances the benefits of cryptos, such as secure money transfer and blockchain technology, with the price stability associated with precious metals, for example.
How Do Stablecoins Work?
There are several types of stablecoins, those pegged to established assets and those that aren’t, known as seigniorage-style. Stablecoins pegged to an asset like gold and are subject to the same price movements, market risks, and regulatory requirements. The purpose of a seigniorage-style mechanism is to use algorithms to control the supply of a coin much like the World Bank printing and destroying money.
Currency-Backed Stablecoins
Fiat-backed stablecoins are tied to a currency, such as the GBP. A third party will hold a reserve of the currency and peg it to crypto, with the stability and value aligned to the cost of maintaining the currency reserve, including any legal requirements such as compliance audits. Stablecoins can be pegged to one currency or multiple, with the US Dollar, Euro, Yen and Yuan the most common. The ratio of the stablecoin vs traditional currency is fixed and reflects the market supply of the crypto.
Currency-backed stablecoins are the most popular type with leading assets including Tether (USDT), USD Coin (USDC), and Gemini Dollar (GUSD). But whilst USDT is the largest by market share, the Bitfinex exchange who facilitated trading in the asset came under public scrutiny after being unable to provide audits for their reserves.
Commodity-Backed Stablecoins
Commodity-backed stablecoins are tied to physical assets such as energy and precious metals, with gold the most frequently used. Because a digital currency is pegged to the value of the commodity, its price may fall if demand for silver drops, for example. Stablecoins are redeemable at the conversion rate to take possession of the asset and can be pegged to more than one commodity.
Crypto-Backed Stablecoins
Crypto-backed stablecoins use smart contracts via blockchain technology while currency-backed stablecoins are validated off the blockchain. Since cryptocurrencies have a history of volatility, if there is a sudden price crash the smart contract may be liquidated. As a result, it’s worth paying off the debt on the smart contract in the event the value of the crypto drops.
There are limited regulations or monetary policy requirements to adhere to with cryptocurrency-backed stablecoins which are often stored on decentralised exchange indexes. Organisations typically over-collateralise and store more of the pegged digital currency to protect against market fluctuations. However, this can be easier to audit as a company’s collateral balance can be checked on the blockchain.
Seigniorage-Style
Non-backed stablecoins do not use a reserve but operate like central banks by increasing or decreasing the supply of a coin to maintain price stability. This is achieved by using algorithms and smart contracts which manage the supply ratio. If the price of the stablecoin surpasses the value of the fiat currency it tracks; more tradable coins will be released driving down the price. The opposite will take place should the price of the stablecoin fall.
Best Stablecoins In 2022
Topping the list of the best 5 stablecoins in 2022 is:
Tether (USDT) – The best-known stablecoin is pegged to gold, fiat currency and cash equivalents
True USD (TUSD) – The leading coin is backed by the US Dollar and is among the most liquid options on the market. The company behind the asset, TrustToken, also offers TrueGBP, which is pegged to the Pound Sterling
Paxos Standard (PAX) – The stablecoin seeks 1:1 parity with the US Dollar
USD Coin (USDC) – Backed by crypto heavyweight Coinbase, the world’s largest Bitcoin broker has released its own popular stablecoin
Binance USD (BUSD) – Another of the top 10 crypto exchanges, Binance’s stablecoin is pegged to the US Dollar at a 1:1 ratio
How To Start Trading Stablecoins
Choose An Exchange
Stablecoins are available to trade on key cryptocurrency exchanges, with examples including Coinbase, Binance, Exodus, Kraken and, Crypto.com. Each exchange provides a list of tradable coins and any fees for UK traders. We recommend opting for a provider with good user reviews and a decent range of assets compared with rankings.
Open An Account
Once traders have decided on an exchange they will need to open a live trading account. Some crypto exchanges permit signing up without KYC documentation, however, most will need identity documents to be approved, including Coinbase. This helps to reduce the risks posed by fraud and money laundering.
Deposit Funds
Before you can start buying and selling stablecoins, you will need to deposit funds. This can usually be done via traditional depositing methods such as Mastercard or e-money transfers. Traders can protect their Stablecoin portfolio by investing in a hardware wallet such as those seen on the XRP Ledger, though it’s worth doing your own comparison of providers before investing. Crypto wallets help protect a user’s private keys (transaction data codes) from hackers.
Research
Stablecoins are becoming an increasingly popular investment vehicle leading to a growth in the volume of information available online. Popular research articles include ‘Stablecoins: A Brave New World’, ‘Stablecoins: The Quest for a Low- Volatility Cryptocurrency’, and ‘Stablecoins: Use Cases and, Stablecoins for Dummies.’ Prospective investors can also make use of online lists that publish data on popular assets, including CoinMarketCap.
Pros Of Stablecoins
Reasons to start buying and selling stablecoins include:
Crypto technology – Retains the secure nature of cryptocurrencies by executing transactions on the blockchain
Online information – Traders can educate themselves with the wealth of free online articles and reports
Hybrid asset class – A medium of exchange that bridges the gap between fiat currency and altcoins
Earn interest – Interest rates on stablecoins are typically greater than high-yield savings accounts
Less volatile – Stablecoins offer a safer alternative to day trading erratic cryptos like Bitcoin
Cons Of Stablecoins
There are also some drawbacks to buying, lending and selling stablecoins:
Unclear tax policies – Charges and taxes may apply when trading stablecoins
Complex setup – The novel nature and differences of this emerging crypto class may deter investors new to altcoins
Centralisation – The central influence of fiat or commodity-backed stablecoins arguably contradicts the decentralised nature of cryptocurrencies
Profit potential – The stable nature of these coins means reduced price swings and trading volumes which may limit the profit a day trader could generate, for example. Instead, investing in stablecoins is likely a longer-term game
Transparency – As highlighted by the Tether lawsuit, some companies issuing and selling stablecoins may be untrustworthy. This lack of transparency can affect the value of coins and impact investor confidence
Global market regulation – The world, including the UK, is still grappling to introduce rules and regulations to monitor the use of cryptocurrencies. Aside from differing rules, it’s difficult to predict what the future holds for cryptos and stablecoin stock which makes it challenging to forecast their future value. Keep an eye on news announcements from the likes of Rishi Sunak, Chancellor of the Exchequer, who has been involved in potential crypto risks and regulations.
Final Word On Stablecoins
Despite some challenges, trading stablecoins is on the rise. They are emerging as a prominent class of cryptocurrencies that aim to bring stability to a hugely volatile marketplace while retaining the flexibility and underlying technology behind altcoins. Several exchanges offer the best stablecoins in 2022, with Coinbase topping our list of recommended brokers.
FAQ
How Do Stablecoins Work?
A stablecoin is a crypto whose market value is tied to an external asset. These assets can be a currency (fiat), commodity (gold), or another digital currency (Bitcoin). The most common stablecoins are USD-backed coins. A reserve of the asset is held by the issuing company.
Are Stablecoins Safe?
Stablecoins retain the same level of security as other cryptos by using blockchain technology but are more stable because they’re tied to a robust reserve asset like gold. The reserve is held by a third party meaning some stablecoins retain an element of decentralisation.
Are Stablecoins Taxable?
The tax treatment of stablecoins and cryptos varies from country to country. In the UK, for example, gains from crypto trading are usually subject to capital gains tax. It could be worth seeking professional tax guidance before you start buying and staking stablecoins.
Are Stablecoins Decentralized?
It is debatable as to what extent stablecoins are decentralized. It can be argued that because the digital currencies are pegged to assets controlled by central banks and governments, such as fiat currency, they are not decentralised. With that said, they can still sit on a decentralised blockchain ledger. As a result, it’s more accurate to say they retain some decentralised qualities but are less so than pure cryptos like Bitcoin (BTC), Stellar (XLM), or Ethereum (ETH).
Are Stablecoins A Good Investment?
Stablecoins are less risky than traditional cryptocurrencies. They may be a good investment for the more cautious individual but less so for a day trader. Other cryptos such as Bitcoin experience up to 10% daily price swings which may be more appealing to active traders.
