The significant fluctuations in cryptocurrency trading have raised doubts about cryptocurrencies and blockchain technology. Investing in crypto assets entails both high risk and high returns. However, amidst this unpredictable environment, there exists a secure option: Stablecoins.

If you’ve been a part of the crypto space for some time, you’ve likely encountered the term “Stablecoins.” These are a much more appealing choice for risk-averse investors who are wary of the crypto market’s volatility.

But you might wonder, what exactly are Stablecoins, and how can you purchase them in India? Fret not; you’ve landed in the right place. This article will provide comprehensive insights into stablecoins.

Embark on this journey to expand your knowledge!

What are Stablecoins?

Stablecoin is an asset class in cryptocurrency whose value is pegged on some external or reserved asset. This external asset might often be a fiat currency, such as an Indian Rupee or the US Dollar. Stablecoins are very popular alternatives to existing cryptocurrencies and can bring about ‘stability,’ as the name suggests, to crypto trading.

Bitcoin has been known to be a notoriously volatile asset. For example, in late March 2020, Bitcoin volatility was as high as 11%, a peak in years of almost always remaining under 8%. 

This volatility is something that stands as a barrier to the paramount heights cryptocurrencies can attain. A concept that combats this with ease is stablecoins. Their benefits include the fact that they bridge the gap between fiat currency and cryptocurrency. Let’s check some of the benefits of stablecoins in the following section.

Benefits of Stablecoins

• Maintaining price stability

Stablecoins are safe and non-volatile assets. They have a value that does not suffer from severe fluctuations like other cryptocurrencies. This makes it an ideal option to invest in. Further, being the crypto equivalent of an asset, based on the concept of the derivative, they reduce risks dramatically. 

• Heavy security due to their model 

Stablecoin prices and network models are all operated from a decentralized, public blockchain network. This ensures full transparency to all users and curbs the risk of cyber threats. Further, since trusted sources back them, nobody really doubts them.

• Time efficient

Stablecoins make the whole transaction process quicker. They are implemented with smart contracts which work autonomously. Since a central authority doesn’t regulate them, financial transactions can be done at any time and faster.

• Lower transaction fees 

Already, the crypto world has much lower transaction and processing costs than in the real world; this is the same for stablecoin transactions. Rather than worry about a large percentage being cut off as duty, the amount here is minimal. 

• Borderless transactions made easy 

Another noteworthy point is its efficiency when it comes to cross-border payments. Usually, cross-border transactions must pass through multiple checkpoints, which substantially delays the speed of payment. This problem is easily mitigated using stablecoins because of the previously mentioned blockchain model.

After having a fair knowledge of stablecoins and its advantages, now, let’s see the different types of stablecoins.

Types of Stablecoins

• Fiat-collateralized Stablecoins

Fiat-collateralized stablecoins are backed by a fiat currency such as the Euro, the British Pound, or the US Dollar. Fiat-collateralized stablecoins hold a fiat currency reserve as collateral for producing sufficient cryptocurrency coins.

Major examples of Fiat-Collateralised Stablecoins are USD Tether (USDT) and USD Coin (USDC). 

• Commodity-collateralized Stablecoins

Tangible assets such as precious metals, oil, and real estate are used to back commodity-backed stablecoins. Gold is the most commonly utilized commodity as collateral for commodity-backed stablecoins. Owners of commodity-collateralized stablecoins are effectively exercising ownership over a commodity. Commodities, in general, have the potential to appreciate in value over time. Hence, these kinds of stablecoins offer the possibility of higher incentives.

Gold Security Currency (GSX), Tether Gold (XAUT), and Paxos Gold (PAXG) are some of the most popular gold-backed stablecoins.

• Crypto-collateralized Stablecoins

Stablecoins that are crypto-collateralized are backed by other cryptocurrencies. Because the reserve cryptocurrency may be volatile, such stablecoins are over-collateralized, meaning that the value of the cryptocurrency held in reserves exceeds the value of the stablecoins produced. Decentralization is the most important characteristic of Crypto-Collateralised Stablecoin.

Stablecoins supported by crypto could help processes become more trustless by improving security and transparency. The benefit of decentralization is that a single body does not control your finances. Furthermore, some crypto-backed stablecoins have many cryptocurrencies backing them to ensure efficient risk distribution. 

An example of Crypto-Collateralised Stablecoins is DAI. Dai was backed by Ether when it was introduced. 

• Algorithmic Stablecoins

An algorithmic stablecoin is linked to a reserve asset, like the US dollar, gold, or any other foreign currency, to ensure price stability and balance the circulating supply of an asset.

In other words, an algorithmic stablecoin truly uses an underlying algorithm that can create more coins when their value rises and purchase them off the market when their value declines.

As the supply, demand, and target price are all controlled by the code, an algorithmic stablecoin is an example of what real decentralization looks like, as there are no regulatory agencies to maintain or monitor the processes.

Algorithmic stablecoins fill a requirement in the crypto ecosystem by reintroducing the seigniorage back into the coin economy where individuals can share it.

An example of the algorithmic stablecoin is USDD which was launched on the TRON blockchain.

Now that you know what stablecoins are, their advantages, and their different types, let’s quickly see how you can buy stablecoins in India.

How to Buy Stablecoins in India?

Here’s a step-by-step guide on how to buy stablecoins in India:

Step 1: Choose a Trusted Crypto Exchange

Begin by selecting a reputable cryptocurrency exchange that supports stablecoins. Ensure the platform is regulated and complies with Indian laws.

Step 2: Complete the KYC Process

Register on the chosen exchange and complete the Know Your Customer (KYC) verification to enable transactions.

Step 3: Add Funds to Your Account

Deposit Indian Rupees (INR) into your exchange account using available payment methods like bank transfers or UPI.

Step 4: Select the Desired Stablecoin

Popular stablecoins like USDT, USDC, or DAI are widely available. Choose the stablecoin you wish to purchase.

Step 5: Execute the Purchase

Use your deposited funds to buy the selected stablecoin at the current market rate.

Step 6: Transfer to a Secure Wallet

To ensure maximum security, transfer the stablecoins to a hardware or software wallet specifically designed for stablecoins.

Step 7: Monitor and Manage

Keep track of your stablecoin investment and make necessary adjustments to your portfolio as required.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.