Stablecoins: The “Digital Dollar” and Their Role in Crypto Investments
Stablecoins are cryptocurrencies designed to maintain a stable price, usually pegged to the U.S. dollar (1 USDT ≈ 1 USD). In such a volatile market like crypto, they act as a safe haven, medium of exchange, and bridge to the traditional financial system.
What are stablecoins and what are they used for?
Definition
A stablecoin is a cryptocurrency that aims to maintain a stable value relative to a fiat currency (usually the U.S. dollar).
- USDT (Tether): the most widely used in trading, backed by reserves from Tether Ltd.
- USDC: issued by Circle, regulated in the U.S., considered more transparent.
- DAI: decentralized, created by the MakerDAO protocol, backed by crypto collateral.
What are they used for?
- Hedge against volatility: if Bitcoin drops, you can switch to USDT to maintain a stable value.
- Global payment method: sending USDT abroad is faster and cheaper than using a bank.
- Dollar bridge in inflationary countries: widely used as “digital dollar savings.”
For beginners, they are the simplest way to enter the crypto world without being overly exposed to volatility.
Risks and strategies with stablecoins
Although they seem like “perfect digital money,” they come with risks:
Collapse risk
- If the issuer doesn’t have real reserves → the stablecoin can lose its peg.
- Famous example: UST (Terra/Luna), which collapsed in 2022 wiping out $40 billion in days.
Regulatory risk
- Governments can ban or restrict their use.
- Example: in the U.S., strict regulation for private stablecoins is under discussion.
Strategies with stablecoins
- Hold as savings: keep USDT or USDC instead of pesos/euros in inflationary countries.
- Lending: lend stablecoins on DeFi platforms (e.g., Aave, Compound) to earn interest.
- Trading: move quickly between cryptos without going back to the banking system.
Intermediate recommendation: diversify across different stablecoins (e.g., half USDT, half USDC) and never leave everything on a single platform.
Professional use of stablecoins
DeFi and yields
- Yield farming: deposit stablecoins into DeFi protocols to earn extra returns.
- Liquidity pools: provide stablecoins to decentralized exchanges (e.g., Curve) and earn fees.
Hedging
- Companies and funds use stablecoins as a hedge against devaluations or capital restrictions.
- Example: an Argentine investor can use USDT to protect against peso devaluation without access to official dollars.
Offshore and taxation
- Advanced investors use stablecoins to move capital between countries without going through banks.
- Risk: capital controls, international regulation (FATF, KYC).
Conclusion
- Beginner: use stablecoins (USDT, USDC, DAI) as simple savings in “digital dollars” and to learn how to use wallets and exchanges.
- Intermediate: use them for trading, lending, and protection against volatility or inflation.
- Advanced: combine them in DeFi, yield strategies, and as international capital hedging tools.
In summary: stablecoins are the bridge between traditional money and cryptocurrencies. They provide stability in a volatile market, but they’re not risk-free. The key is to understand that not all are equal, and always diversify.
It’s very important to diversify your portfolio to do it well—revisit the oracle to find out what else to invest in and how to do it right.
Glossary
Blue chips: established companies with decades of existence, billions in revenue, product diversification, consistent profits, cash reserves, and if they need financing, banks and markets lend to them because they trust their solvency.
Broker: a platform or financial intermediary that allows you to buy and sell stocks. Some brokers are international (e.g., Interactive Brokers, eToro), and others are local (depending on the country).
Call: a financial contract known as a derivative, whose value depends on a stock. It is the right to buy a stock at a certain price in the future.
Cap rate: capitalization rate, an indicator of the annual return of real estate investment.
Cash flow: monthly cash generated by the property after expenses (rent – taxes – maintenance).
Certificates of Deposit (CDs): "similar to fixed-term deposits, but usually issued by banks or financial institutions in more formal or international markets. They allow investing in local or foreign currencies. They may have fixed or variable interest options, depending on the contract.
Commodities: any basic, homogeneous, tradable product produced in large quantities and traded in global markets. They are used both for direct consumption and for industrial production.
Covered Call: investors holding stocks who sell “Call” options to generate extra income.
Covered bonds: bonds backed by specific assets, lower risk than regular corporate bonds.
ETF: an investment fund traded on the stock exchange like a stock.
Fixed-term deposits: depositing money in a bank for a set period in exchange for a fixed interest rate. At the end of the term, you recover your capital plus interest.
Futures contracts: agreements to buy or sell a certain quantity of an asset at a fixed price in the future.
Hedging: investing in stocks of other types such as precious metals or utilities to balance losses if company stocks fall.
High yield / junk bonds: small companies or those with liquidity problems, high risk, and high return.
Interest-bearing accounts: bank accounts that generate daily or monthly interest on the available balance.
Interest rate swaps: a financial contract between two parties to exchange interest payments on a notional principal. The most common swap is exchanging fixed rates for variable interest rates or futures.
Inverse ETFs: gain value when the index they track goes down.
Joint ventures: partnerships between two or more parties to develop a joint project, sharing risks, costs, and profits.
Leverage: using financing (mortgage or loan) to buy more properties than your capital would allow.
Leveraged ETFs: multiply market movements (2x or 3x), up or down.
Liquidity: in economics, liquidity is the ease with which an asset can be converted into cash without losing value.
Microcaps: very small cryptocurrencies by market cap since they are new or unknown projects. They have the potential to multiply by 100 but also the risk of disappearing overnight.
Mining (Bitcoin): using computers to validate transactions and earn rewards. Miners compete, consume electricity, and receive rewards in BTC.
Mutual Fund: a collective vehicle where multiple people contribute money that a professional manager invests in different financial assets: stocks, bonds, commodities, or a combination of them.
Net Asset Value (NAV): the price of each unit, which fluctuates according to the value of the mutual fund’s assets.
Offshore accounts: accounts opened in another country, used by some investors to access products not available locally or for tax advantages. It’s legal if declared, but each country has its own regulations.
Portfolio: the total set of financial assets (such as stocks, bonds, mutual funds, or real estate) owned by an investor or entity, aimed at achieving financial goals through diversification and risk management.
Put: a financial contract known as a derivative, whose value depends on a stock. It is the right to sell a stock at a certain price in the future.
REITs (Real Estate Investment Trusts): real estate funds that allow investing in large portfolios without directly buying property. They are traded through brokers like regular stocks, and there are even REIT ETFs.
Staking: some blockchains (Ethereum, Cardano, Solana) allow you to “stake” your coins on the network and earn interest. This generates passive income similar to a fixed-term deposit, but with more risk.
Unit share: when you contribute money to a mutual fund, you receive “units” representing your proportional participation in the portfolio.
Validation (Ethereum and other proof of stake): locking large amounts of coins to maintain the network and receive rewards.