Stablecoins vs Bitcoin: Note the Differences

Stablecoins are a type of cryptocurrency where stability is maintained by tying it to an asset or a basket of assets such as gold, fiat currencies or other cryptocurrencies. Bitcoin, an example of a decentralized currency, is not tied to any assets and its value fluctuates with supply and demand in what is known as an open market. To get the most out of their bitcoin trading, traders can use platforms like Immediate Edge.

Some believe that stablecoins will be crucial because governments can more easily control them than decentralized digital currencies like bitcoin. An advantage of Stablecoins is that they are backed by non-volatile assets, which guarantees that their value will not fluctuate.

However, Bitcoin is a special case as it has proven to be a safe haven to avoid market crashes and grows stronger over time as more people invest in it. Bitcoin has shown strong resilience against political turmoil and volatile global markets, even rising during periods of recession in certain countries. Let’s discuss some major differences between stablecoin and bitcoin.

Stablecoins and Bitcoin: Two Main Approaches

Japan, where bitcoin trading volume increased following the government’s decision to impose capital control measures on withdrawals from individuals, is the latest example of a highly active country in bitcoin. That’s because supply and demand market forces determine Bitcoin’s price. The more people want to buy bitcoin, the higher the price. In contrast, Stablecoins tend to be pegged or backed by gold or government fiat currencies and controlled by entities such as central banks. As a result, they are often seen as safer than other crypto assets.

The main goal of Stablecoins is to make it possible to use cryptocurrencies in daily transactions without price volatility and risk. For example, an online retailer that accepts bitcoin may have trouble accepting payment if bitcoin’s value suddenly drops while customers are still making payments in bitcoin.

Basic differences between stable coin and bitcoin:

1. Stablecoins have infinite access:

By comparison, Bitcoin’s total supply is only 21 million Bitcoins. Just like gold, there is a limited number of Bitcoins available. Bitcoin solves this problem by creating a decentralized network of miners that verify and record every transaction on the blockchain ledger. In contrast, Stablecoins basically eliminate this problem by being issued by a central authority such as a central bank or some Fintech Startups and having a limited supply.

2. Stablecoins can be linked to foreign currency:

Bitcoin is not tied to any currency and is as liquid as any other cryptocurrency. However, some major banks have started to create their stablecoin based on fiat currencies such as dollars or euros, which they plan to issue in the future. These stablecoins, called Tether, are valued by a claim that they are backed by US dollars held in reserve by the issuing entity.

3. An independent organization controls stablecoins:

Bitcoin is governed by a decentralized network of miners who verify and record every transaction made on the blockchain ledger. Bitcoin is not a centralized authority like central banks or some other company that decides how many of each coin to issue and whether to create new coins to keep its value increasing. Instead, the bitcoin network is powered by the users who vote for “bitcoin miners”, who produce Bitcoins and valid transactions on the blockchain ledger when transactions are confirmed for inclusion in a block.

4. Stablecoins are not mined:

Unlike bitcoin, Stablecoins are issued and controlled by an organization or a central bank and are not mined. Instead, they are created at a fixed rate using the process of minting or issuing new coins to replace the older coins that are destroyed each year. As such, they cannot be mined as they require a lot of mining intervention to create them, and as such they become valuable if there is less mining activity on the network.

Different types of Stablecoins:

Stablecoins can be classified into one of the following categories:

1. Fiat-backed Stablecoins:

These are the most popular forms of Stablecoins and they get their value from other currencies such as the US Dollar, Euro or Yen. Fiat collateralized Stablecoins are backed by a reserve of real assets such as gold, fiat currency or other cryptocurrencies, which guarantees that the tokens are worth a certain amount. The downside of these coins is that they face the risk of price volatility as they are based on national currencies.

2, Stablecoins with cryptocurrency security:

They get their value from other cryptocurrencies. An example is the so-called Dai coin based on the Ethereum blockchain, created by the Make-do platform. Ethereum’s price supports this stablecoin, so it’s basically an ERC-20 token that runs on the Ethereum blockchain. So if the Ethereum price goes up or down, the value of Dai coins will change in the same way.

3. Stablecoins without collateral:

These types of Stablecoins are not backed by any assets and resist price volatility because their supply expands and contracts automatically according to market demand for their tokens.