What are stablecoins and how do they work?
Over the past few years, the popularity of cryptocurrency (like Bitcoin) has exploded amongst those in the share trading world. However, the volatility of many digital currencies has forced investors to look for more stable ways to purchase crypto.
Stablecoins are a type of cryptocurrency whose value is ‘pegged’ to another currency, commodity or financial instrument, like US dollars, gold, and in some cases, other cryptocurrencies.
The term ‘stablecoins’ comes from its relative stability compared to high-volatility crypto like Bitcoin, and is seen as a more useful way to make everyday transactions using digital currencies.
The basic idea of a stablecoin is that it should largely be able to maintain its purchasing power and avoid excessive inflation, whilst offering the stability of fiat currencies.
Stablecoins are thought to be stable because they are backed by a reserve asset that helps to keep the price steady, negating the volatile nature of cryptocurrencies, like Bitcoin, whose value comes mainly from supply and demand.
Some stablecoins are backed by reserve assets of fiat currency, some are tied to other cryptocurrencies, and some can even have no reserve assets – instead, they’re controlled by algorithms.
How do stablecoins work?
You can put stablecoins into three main categories, depending on the way they operate. These types of stablecoins are fiat-collateralised stablecoins, crypto-collateralised stablecoins and algorithmic stablecoins.
Fiat-collateralised stablecoins
Fiat-collateralised stablecoins are cryptocurrencies that have their value pegged to government-issued fiat currency (e.g. USD and AUD) in order to stabilise the coin’s value.
These sorts of stablecoins may also hold reserve assets like gold, silver, and crude oil as collateral.
Crypto-collateralised stablecoins
Crypto-collateralised stablecoins are actually backed by reserves of other cryptocurrencies, despite the volatility of these traditional crypto assets.
Issuers of crypto-backed stablecoins will keep far larger reserves of crypto than the number of stablecoins that they issue to consumers, as a way of balancing out volatility.
Algorithmic stablecoins
Algorithmic stablecoins sometimes aren’t pegged to a reserve asset at all. Instead, they use computer algorithms to control the supply of their stablecoins, similar to the way that central banks control fiat currency.
Are stablecoins safe?
While stablecoins are considered a safer alternative to other forms of cryptocurrency, they are not without their risks.
It comes down to several factors, like how they are backed (e.g. with a fiat currency like the USD, or controlled by a computer algorithm), who the issuer is, and whether future government regulations could impact its value negatively.
The Reserve Bank of Australia released a bulletin in December 2022, highlighting some of the risks associated with stablecoins . These risks can include:
- Stablecoins can be vulnerable to runs, meaning a mass withdrawal of funds by investors, leading to an extreme drop in value (especially for algorithmic stablecoins that are not backed by reserve assets).
- The reserve assets that a stablecoin uses as collateral may be affected by market, credit, and liquidity risks.
- Issuers of stablecoins may not be held responsible for lost or stolen crypto-assets, due to being unregulated, the crypto ecosystem’s complexity, and legal grey areas surrounding the redemption rights of consumers.
Can stablecoins lose value?
As stablecoins are asset-backed, the value of the asset can play a role in how much a stablecoin is worth.
For example, if a stablecoin is pegged to the value of gold, any price movement of gold will cause the stablecoin to either increase or decrease in value accordingly.
And it’s the same for stablecoins tied to fiat currencies, like USD or AUD. Some stablecoins, like TrueUSD (TUSD) and Tether (USDT), are denominated almost dollar-for-dollar with USD.
Again, if a stablecoin is pegged to a fiat currency that loses value, then your stablecoin will lose value too.
Which stablecoin is the safest?
As stablecoins are asset-backed by reserves, the safest kind of stablecoin will be one that is tied to the safest kind of asset. Many consider this to be the US dollar, due to its relative strength compared to other fiat currencies.
For example, a stablecoin tied to a reserve asset like USD will likely be safer than one tied to a cryptocurrency like Bitcoin.
But you will also need to consider how trustworthy the issuer of a stablecoin is. If a stablecoin issuer has its reserves regularly audited and has a proven track record of transparency, then it may be a safe bet to invest in its coin.
Looking for a new trading platform to invest in cryptocurrency and shares? Compare share trading platforms with Mozo to see an overview of brokerage and monthly fees, alongside the features of over 30 share trading platforms at a glance. Or, have a look at some below.
Looking for the cream of the crop when it comes to online share trading platforms? Check out the best share trading accounts in Australia in 2023.
Share account comparisons on Mozo
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Share Investing
Standard
Small trade brokerage
Monthly fee
$0.00$0.00CMC Markets Invest makes it easy to trade with a handy web and mobile platform, competitive pricing and thousands of securities. Buy Australian and US shares from $0 brokerage (T&Cs apply - see website for full details).
Share Investing
CMC Markets Invest makes it easy to trade with a handy web and mobile platform, competitive pricing and thousands of securities. Buy Australian and US shares from $0 brokerage (T&Cs apply - see website for full details).
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- -
- Brokerage details
- $0 for trades up to $1,000. Greater of $11 and 0.1% for trades over $1,000.
- Settle from any bank account
- Settlement account offered
- ANZ Cash Account
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- -
Read reviews and learn more about share accounts
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Share Trading
Small trade brokerage
Monthly fee
$3.00$0.00Trade more than 22,000 shares, ETFs and options across the Australian, US and Hong Kong markets on the moomoo Australia platform. And only pay from A$3 for local CHESS-sponsored trades and US$0.99 for all US trades. Other fees apply. Earn up to 6.8% p.a. introductory rate for 30 days, applicable to up to AU$80,000 on uninvested cash, and get 10 free stocks with eligible deposits (T&Cs apply)
Share Trading
Trade more than 22,000 shares, ETFs and options across the Australian, US and Hong Kong markets on the moomoo Australia platform. And only pay from A$3 for local CHESS-sponsored trades and US$0.99 for all US trades. Other fees apply. Earn up to 6.8% p.a. introductory rate for 30 days, applicable to up to AU$80,000 on uninvested cash, and get 10 free stocks with eligible deposits (T&Cs apply)
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- Ongoing free access to real-time US market data.
- Brokerage details
- ASX trades are 0.03% the transaction amount, minimum $3.00 per order. US trades from $0.99 USD, other fees apply.
- Settle from any bank account
- Settlement account offered
- Customer funds held in segregated trust accounts with HSBC.
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- Additional regulatory pass-through fees apply for US trades. Options are available for US markets only.
Read reviews and learn more about share accounts
Share Trading
Small trade brokerage
Monthly fee
$7.70$0.00Buy and sell with a low $7.70 flat fee per trade and access to all ASX Shares and ETFs to invest in with GO Markets. Enjoy dedicated local customer support, a regulated Australian company for trading ASX Shares and ETFs. Plus, enjoy $0 Brokerage on your next 15 trades! (T&Cs apply).
Share Trading
Buy and sell with a low $7.70 flat fee per trade and access to all ASX Shares and ETFs to invest in with GO Markets. Enjoy dedicated local customer support, a regulated Australian company for trading ASX Shares and ETFs. Plus, enjoy $0 Brokerage on your next 15 trades! (T&Cs apply).
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- -
- Brokerage details
- $7.70 brokerage for trades under $100,000, then 0.05%.
- Settle from any bank account
- Settlement account offered
- Macquarie Cash Management Account
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- -
Read reviews and learn more about share accounts
Share Trading
Small trade brokerage
Monthly fee
-$0.005000+ stocks and 19 exchanges all on the eToro app. Invest in ETFs with $0 commission and stocks with just US$2 per trade. Join the world’s leading social trading platform, trusted by 30+ million users worldwide.
Share Trading
5000+ stocks and 19 exchanges all on the eToro app. Invest in ETFs with $0 commission and stocks with just US$2 per trade. Join the world’s leading social trading platform, trusted by 30+ million users worldwide.
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- -
- Brokerage details
- $2 USD brokerage fee for stock trades, 0.5% fee is applied to all funds paid into or taken out of the USD settlement account
- Settle from any bank account
- Settlement account offered
- Customer funds are held in a Trust Account managed by JP Morgan Chase and Co
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- $5 USD withdrawal fee applies and a $10 monthly inactivity fee is charged after 12 months with no login activity.
Read reviews and learn more about share accounts
Tiger Account
Small trade brokerage
Monthly fee
$2.99$0.00Tiger Brokers is an online broker listed on NASDAQ. It offers access to US, ASX & HK stocks, ETFs and US options trading. Mozo special offer for new users only: 7% p.a. on uninvested cash balance up to AUD $100,000 for the first 30 days, with a value up to AUD $575. Plus receive US$30 NVIDIA (NVDA) fractional shares with an accumulated deposit of at least AUD $2,000 within 7 days of the first deposit. T&Cs apply – for full details, go to the Tiger Brokers website.
Tiger Account
Tiger Brokers is an online broker listed on NASDAQ. It offers access to US, ASX & HK stocks, ETFs and US options trading. Mozo special offer for new users only: 7% p.a. on uninvested cash balance up to AUD $100,000 for the first 30 days, with a value up to AUD $575. Plus receive US$30 NVIDIA (NVDA) fractional shares with an accumulated deposit of at least AUD $2,000 within 7 days of the first deposit. T&Cs apply – for full details, go to the Tiger Brokers website.
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- Mozo special offer for new users only: 7% p.a. on uninvested cash balance up to $100,000 AUD for 30 days valued up to AUD $575. Plus get USD $30 NVDA fractional shares with a deposit of AUD $2,000 within 7 days of the first deposit. T&Cs apply.
- Brokerage details
- 0.03% of trade value, $2.99 minimum brokerage.
- Settle from any bank account
- Settlement account offered
- no
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- -
Read reviews and learn more about share accounts
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