USDT and BUSD Stablecoins: How Do They Work?
Cryptocurrencies can be a challenging market to approach. Complicated conversions to and from fiat currencies combined with their high volatility can be particularly off-putting for the average investor.
Stablecoins are some of the best on-and-off ramps for both beginner and experienced investors. These fiat-pegged cryptocurrencies allow you to temporarily shield yourself from high volatility and remain in the market nearly risk-free.
In this article, we explore some of the biggest advantages of stablecoins as well as some of their drawbacks. To this end, we explain how they work and how you can take advantage of them as a trader.
Stablecoins in 2022
The cryptocurrency market is experiencing steady growth. More than 17,000 coins and tokens are currently listed on CoinMarketCap. What’s even more interesting is that stablecoins are also growing steadily in value and in numbers. Tether used to own most of the stablecoin market share in the past years, but this isn’t the case anymore.
Today, in the top 20 cryptocurrencies by market cap, there are no less than five different USD-backed stablecoins — USDT, USDC, BUSD, UST, and DAI. These stablecoins have a cumulated market cap of over $170 billion, and this market will only grow in the future. As more investors join the crypto space, the demand for stablecoins grows as well.
But how do these stablecoins work? And why are investors choosing them over other cryptocurrencies? To answer these questions, let’s have a closer look at two examples.
Peculiarities of USDT and BUSD
The main characteristic of stablecoins is that they are pegged to an existing fiat currency. So, unlike cryptos like Ethereum or Bitcoin, their value is not volatile. USD-backed stablecoins like USDT and BUSD always equals $1, hence their name STABLEcoins.
To achieve this, the issuers of these stablecoins hold dollar assets in their reserves equal to the number of stablecoins in circulation. This way, users are ensured they will always be able to redeem their tokens for an equal amount of fiat money.
When comparing BUSD vs USDT, we can pinpoint some notable differences. Tether, which issues USDT, hasn’t always been transparent about its reserves. Many even believe that only a small amount of USDT is actually backed by real USD. This could be a catastrophic scenario for the entire crypto market.
BUSD is issued through a partnership between Paxos and Binance. It is regulated by the New York State Department of Financial Services. This ensures BUSD cannot be issued without backing.
On another note, USDT and BUSD are quite similar from a technical standpoint, as they can be found on a wide range of different blockchains. This ensures good coverage for both coins to minimize fees in case of transfers and quick swaps.
Pitfalls and Opportunities
Stablecoins have some major advantages compared to other cryptocurrencies. Their lack of volatility allows you to enter and exit the market and exchange them for other cryptocurrencies to make quick profits. You don’t have to go through costly crypto-to-fiat swaps, as you remain in the crypto ecosystem at all times.
Since they are in such high demand, many lending platforms give out great yields for providing liquidity with stablecoins. As such, you can get as much as 10% APY with stablecoins by lending them on platforms such as Blockfi or Celsius. Comparatively, lending out cryptos like Orchid or Ethereum will only get you around 1-3% APY. However, coins like Orchid also have their advantages, which you can review here: https://godex.io/blog/price-predictions/orchid-oxt-crypto-price-prediction-for-2022-2025-godex-io
Their lack of volatility, while being their biggest strength, is also their biggest weakness. Stablecoins don’t allow you to make a profit by speculating on their price, as their value always remains pegged to the USD. While their value can somewhat vary, these fluctuations are minimal. Making noteworthy profits would require huge amounts of capital.
Stablesoins like BUSD and USDT have become essential to the crypto markets as a whole. Traders and investors use them to consistently remain in the crypto market while avoiding high periods of volatility. They are a great way for newcomers as well. They can provide some of the benefits of blockchain technology, such as fast transfers and cheap international transactions, without the dangerous volatility.
The lack of volatility also means that you can’t use stablecoins to make significant profits in the crypto market. They are best used as a tool for preserving capital, instead of making profits.
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John an experienced IT specialist with over a decade of experience in the industry. He holds a Bachelor’s degree in Computer Science and has worked in various positions, including software developer, system administrator, and network engineer. John’s expertise includes cloud computing, cybersecurity, and data analytics. He has completed numerous certifications in these areas and is highly knowledgeable in the latest technologies and trends.