What are stablecoins?
A stablecoin is a type of cryptocurrency designed to maintain a stable value. This category of digital assets is backed by a traditional currency (fiat) such as the dollar or euro, or by an asset such as gold.
Stablecoins offer a safer alternative to storing or transferring value as they aim to maintain parity and thereby reduce volatility, unlike traditional cryptocurrencies which are subject to significant price fluctuations.
How a stablecoin works varies depending on the mechanism. Stablecoins can be supported by:
- Traditional assets: including fiat currency such as dollars, euros or pounds sterling.
- Algorithms: supported by smart contracts that regulate fluctuations in value.
- Cryptocurrencies: reinforced by another cryptocurrency as security and decentralized and open software.
The types of stablecoins and how they protect against inflation
Due to their digital and decentralized nature, stablecoins offer several advantages to protect against inflation. They are not affected by government intervention or monetary policy, which is a crucial factor in countries with high inflation. In these countries, saving in local currency is not possible and purchasing foreign currency may be restricted, making stablecoins a viable solution as they only require internet access and a cryptocurrency exchange.
There are three main types of stablecoins, each with different features and security methods:
- Fiat-backed stablecoins: They are perfect tools against inflation as they offer greater stability and transparency and are backed by real money in banks. However, the administration is centralized as it depends on a bank, and there may be regulations for its use depending on the country and its restrictions. Furthermore, if the fiat currency devalues, the value of the stablecoin automatically decreases.
- Asset-backed stablecoins: Assets such as gold or real estate support them and offer significant inflation protection, as do tangible assets with a stable value. This type of “token” provides significant liquidity to the market. However, multiple intermediaries are required, potentially leading to centralization, and audit sessions are required to ensure reliability.
- Algorithms for stablecoins: These cryptocurrencies ensure stability through algorithms that manage supply and demand mechanisms. Because they do not rely on assets for protection, their value remains unchanged, ensuring adequate inflation protection. It is a decentralized option controlled by algorithms without third-party influence and is considered the most stable stablecoin on the market. However, a system failure could change its mechanism at any time.
Invest in stablecoins to protect yourself from inflation
The first step is to register with a reputable crypto exchange that offers stablecoins. Once you are on the platform, you can exchange money or less stable cryptocurrencies for stablecoins.
It is crucial to check the reputation of a crypto exchange. Choose platforms with maximum transparency and reliability. Well-known platforms include Binance, Kraken and Coinbase.
Be careful when investing in stablecoins
It is important to stay well informed, seek expert advice and monitor economic changes and factors that influence inflation. This approach enables better decision-making about when and how stablecoins should be acquired for optimal protection. As with any investment, diversifying your portfolio is critical for maximum inflation protection. Owning multiple types of stablecoins reduces risk and increases profits. Due to their stability and various backup options, stablecoins are an excellent way to protect yourself during inflationary crises.