Cryptocurrencies were once regarded as currencies that can be used as a hedge against inflation. But with the volatile nature of cryptocurrencies, investors are really skeptical when it comes to investing in crypto.
In the past year, we saw the rise and fall of both old and cryptocurrencies in the market, therefore, showing the very volatile nature of cryptocurrencies.
But unlike the widely known cryptocurrencies like bitcoin, Ethereum, Solana, and others, stablecoins provide more stability because they are pegged to popular fiat currencies such as the US dollars.
What is inflation?
Basically, inflation is when there is a fall in the value of a currency which will lead to an increase in the price of goods and services. That is the main reason why the price of goods and services hardly remain the same over time.
Inflation can either be good or bad for an economy. When there is a low inflation rate, it leads to an increase in activities that bring about a boost in economic growth such as investment, borrowing, and spending.
On the other hand, when there's a high inflation rate, it leads to a surge in the price of goods and services, the cost of living becomes unaffordable and a whole lot of other things
In economies where there's a high inflation rate, people tend to spend more to prevent the decrease of the value of their money in their savings account.
What are stablecoins?
Stablecoins are a type of cryptocurrencies that offer stability in price which is often provided by the fiat currencies they are pegged to. Most of the stable coins used today are pegged to US dollars.
Stablecoins are now widely known and acceptable because of the advantage they provide. Basically, stablecoins provide somewhat of a two-in-one package.
They provide the security and transaction speed of cryptocurrencies and, the stability of fiat currencies which make them volatility-free.
however, there are different types of stablecoins some of which are;
The Fiat-Collateralized Stablecoins are often pegged to fiat currencies like US dollars and Euros and other forms of collateral like gold or silver. Some examples of this type of stablecoins are USDT, USDC, and BUSD.
The Non-Collateralized Stablecoins are stablecoins that are often backed by other cryptocurrencies. Some examples of such stablecoins are DAIUSD and ETHUSD.
How can stablecoins serve as your hedge against inflation?
A lot of fiat currencies of different economies around the world are liable to experience a high inflation rate. This is because these currencies are not backed by physical goods or commodities.
Not all fiat currencies are stable. Currencies from countries with a growing economy are more stronger and stable. Some of the stronger and more stable fiat currencies are the US dollar and Euro.
With many of the world's fiat currencies prone to high inflation. With the stability and security of stablecoins,it can serve as an alternative to the fiat currencies, thereby providing a hedge against the high inflation rate of the fiat currencies and also protecting wealth.
Posted Using LeoFinance Beta