If you are well-versed in the world of cryptocurrency, then Bitcoin needs no introduction. In fact, for the average person with even a little bit of knowledge about digital currencies, this world-famous coin should at least be somewhat recognizable. It has been ingrained in the public consciousness to the point where even if you do not know how Bitcoin works, you are aware of it.
Whether you support it or oppose it, we can all agree that it has changed finance as we know it. No more is fiat currency the only player in the economic game. Its launch has triggered the creation of many other cryptocurrencies, but only a few have been able to garner as much attention as Bitcoin has over the years.
However, we are seeing a new player enter the field. While still technically a cryptocurrency, it is a unique breed. Going by the name of “stablecoins,” these tokens have managed to climb up the proverbial ladder and made a name for themselves as an alternative to Bitcoin, Ethereum, and other similar digital currencies. The question that this rivalry raises – especially from novices in the crypto space – is what sets them apart?
Origins of the new competitor
Before dissecting the differences between Bitcoin and stablecoins, it is important to look at how stablecoins came to be. Interestingly enough, their birth has connections to Bitcoin and cryptocurrencies as a whole.
Bitcoin and other digital currencies have proven to be beneficial, with one notable advantage being the lack of an intermediary entity. Thanks to this absence, crypto’s use can be opened to anyone anywhere in the world. For all the advantages, there is one key drawback that both lovers and haters of Bitcoin can agree on. That being its wildly volatile price changes. This unpredictability may be appealing to some, but it is a dealbreaker to others.
From this problem came a solution in the form of stablecoins. It tries to confront this price fluctuation issue by tying a cryptocurrency’s value to other assets that are much more stable. The asset these coins are pegged to can either be money (dollars, euros, etc.) or even precious metal. So, if you look up prominent stablecoins and wonder why some are named after metals, such as Gold Coin, this is the reason why. Overall, the purpose of stablecoins is to bring – for lack of a better word – stability to the prices of digital currency.
Bitcoin is a decentralized digital currency that operates with the involvement of a central bank or single administrator. It can be sent from one user to another on the peer-to-peer Bitcoin network without needing intermediaries to participate in the transactions. These trades receive verification from various network nodes and are recorded on a blockchain (i.e. a public distributed ledger).
Stablecoins are a different type of digital currency. As mentioned before, they are pegged to the value of another asset, be it a fiat currency, cryptocurrency, trade commodity, or other commodities. There are four types of stablecoins: fiat-collateralized, crypto-collateralized, commodity-collateralized, and non-collateralized.
Bitcoin is among the most popular cryptocurrencies whose price tends to simultaneously rise and drop, thus forcing traders to wait for the ideal time to exchange bitcoins. The value of stablecoins is equal to the stable asset it is pegged to and does not change accordingly.
Some of the more basic differences between the two include the following:
- Bitcoin is non-regulated, whereas stablecoins are regulated.
- Stablecoins are not volatile with their prices. This was meant to rectify Bitcoin’s infamous price volatility.
- Bitcoin is typically used for trading and exchanges, as well as payment. Stablecoins, on the other hand, are applicable for real-life use cases.
Why stablecoins are a worthy opponent
The increasing popularity of stablecoins in the crypto space is courtesy of two major factors. One is the fact that they stabilize the crypto market. There is no limited supply of stablecoins nor do they operate on a fixed schedule, unlike crypto tokens. They are instead distributed based on the conditions and economics of the market. These stablecoins receive backing from any type of collateral to protect investors against a potential crypto market crash.
The other factor is attributed to the inflow of venture capital money. This development may appear a bit strange because the lack of price volatility in stablecoins reduces the possibilities of the investor’s profits. The likelihood of new business models emerging in the stablecoin market effectively provides regular investors and venture capitalists with a method of generating a profit.
While the purpose of stablecoins is to fix a significant issue with Bitcoin, it has become an independent presence in the crypto space. As a matter of fact, it is not a stretch to claim that even as Bitcoin reaches all-time highs and the crypto is added to more to corporate balance sheets, the primary driving force behind cryptocurrency’s popularity increase will be stablecoins. In time, they will gain as much recognition for boosting crypto’s presence as Bitcoin has for kickstarting modern-day digital currencies.
Applications of Bitcoin continue to develop and remain a dominant force in the crypto space. Even though it retains the top spot, stablecoins are not far behind in innovation and popularity. They exist as an alternative option for those who are not keen on Bitcoin’s unpredictability.
It is entirely up to the investor as to which they should devote their time and money, so preferences are ultimately the deciding factor. Stable or unstable? Regulated or unregulated?