July 25, 2021 - Notes on Stablecoins in Crypto
This article comes from a post that I posted on a blog website. Parts of this has been edited and updated here.
A stablecoin is a crypto coin (asset) that has a price that remains stable for the most part. Stablecoins have low volatility as price swings in these stablecoins are low.
Examples of stablecoins in crypto include:
The dollar based stablecoins usually have prices of $1 with plus or minus three cents or so.
According to https://defirate.com/stablecoins/, there are two stablecoin types. These are fiat-collateralized stablecoins and crypto-collateraized ones.
Stablecoins that are fiat-collaterized retain their 1 to 1 peg. This is done by using trusted third parties to hold and equivalent amount of legal tender in reserves. Fiat collaterzied stablecoins include:
Crypto-collaterized stablecoins are over-collaterialized. This is for accounting for price volatility. According to https://defirate.com/stablecoins/, a common ratio of 150% is set. As one example, at least $150 worth of ETH would be collateral in order to issue $100 of the DAI stablecoin. Stablecoins in this category include:
At first, I never understood the purpose of stablecoins. I asked myself why would I want something that would not have massive gains. Stablecoins can be used to protect the crypto portfolio from sudden drops in price.
If almost all crypto prices crash and have their prices go down by 40%, stablecoins will still hold a lot of their value. Think of stablecoins as shields against market crashes. Converting crypto gains into stablecoins sounds like a good strategy. After price drops or even crashes, the held stablecoins can be used to buy the dips in hopes/expectations of the cryptos going back up in price.
I would not be the best person to ask for how much stablecoins you should have. Maybe 10-20% of the portfolio in stablecoins. That way you have stablecoins on hand to buy any crypto that is heavily discounted and expected to go up.