How to Buy Stablecoins | Edenex

Stablecoins: What Are They and How to Buy

Stablecoins have become a vital tool in the world of digital assets. Unlike traditional cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH), stablecoins maintain a stable value, typically pegged to a specific asset—most commonly fiat currencies like the US dollar or euro. This stability has made them a popular exchange medium in the market. Stablecoins like USDT combine the benefits of decentralization and high speed with low volatility.

However, despite their obvious advantages, stablecoins also have risks and limitations to consider before buying and using these assets. Whether you're a seasoned crypto investor or a newcomer, it is crucial to thoroughly research stablecoins and choose the solutions that best align with your financial goals.

Time to explain what stablecoins are, their main advantages and disadvantages, and how and why you might want to buy them.

What Are Stablecoins?

The primary goal of stablecoins is to minimize the volatility characteristic of most cryptocurrencies. Unlike BTC or ETH, whose prices may fluctuate by double-digit percentages within a day, stablecoins maintain a consistent value. This makes them attractive for everyday transactions and trading.

Main Types of Stablecoins

Stablecoins can be categorized based on how their value is backed:

1. Fiat-backed stablecoins: These are backed by real currency in a 1:1 ratio. The most well-known example is Tether (USDT) backed by the US dollar. For every USDT token, one dollar is held in the company's reserves.

2. Cryptocurrency-backed stablecoins: These stablecoins are backed by other cryptocurrencies. A popular example is DAI backed by Ethereum (ETH) and other digital assets. This approach reduces dependence on traditional financial institutions but complicates the mechanisms for maintaining price stability.

3. Algorithmic stablecoins: Instead of asset reserves, these stablecoins use complex algorithms to maintain their value. For instance, when demand for such stablecoins decreases, the number of tokens in circulation can be reduced to stabilize the price. An example of this was TerraUSD (before its collapse in 2022).

Popular Stablecoins

1. Tether (USDT): The most popular and liquid stablecoin on the market. USDT is widely used for trading on cryptocurrency exchanges and is often seen as a safe haven for traders during periods of high market volatility.

2. USD Coin (USDC): Another stablecoin pegged to the US dollar, managed by the Centre consortium, which includes Circle and Coinbase. USDC is known for its high transparency—each dollar backing the token is regularly audited.

3. DAI: A cryptocurrency-backed stablecoin that operates on Ethereum’s blockchain via smart contracts. Unlike USDT and USDC, DAI isn’t reliant on centralized companies and is backed by other crypto assets, making it popular in decentralized finance (DeFi).

4. Binance USD (BUSD): Issued by the leading cryptocurrency exchange Binance in partnership with Paxos, BUSD is pegged to the US dollar and is widely used on the Binance platform for trading and investment.

How to Buy Stablecoins?

Buying stablecoins can be done on cryptocurrency exchanges, via exchangers, or through specialized financial apps. The process generally involves the following steps:

1. Choose an exchange or exchanger: Popular exchanges like Binance, Coinbase, Kraken, or Huobi offer a wide selection of stablecoins. You can also use online exchangers or P2P platforms to purchase stablecoins — Edenex is one such example.

2. Register and complete KYC: Most exchanges require registration and completion of a Know Your Customer (KYC) procedure. This is necessary to comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.

3. Fund your account: After registering, you have to replenish your account on the exchange platform. This can be done via bank transfer, card, or by using another cryptocurrency.

4. Buy stablecoins: Once your account is funded, you can select the stablecoin and proceed with the purchase. For instance, on Binance, you can buy USDT, BUSD, or other stablecoins through trading pairs.

5. Withdraw funds: After purchasing stablecoins, you can withdraw them to an external wallet for storage or use them for further operations.

Pros and Cons of Stablecoins

Pros

- Stability: The primary advantage of stablecoins is their stability. Pegging to fiat currencies or other assets avoids sharp price swings, making them convenient for transactions and value storage.

- Ease of use: Stablecoins can be used for fast and low-cost transactions worldwide. They can be easily sent and received without banks or other financial intermediaries.

- DeFi integration: Stablecoins are actively used in decentralized finance (DeFi) for lending, staking, and other financial operations. For example, DAI is often used as collateral for obtaining loans on DeFi platforms.

- Low fees: Compared to traditional banking transfers, stablecoin transactions are often cheaper and faster, particularly for international transfers.

Cons

- Regulatory risks: Stablecoins are under increasing scrutiny from regulators worldwide. There are concerns they might be used to bypass traditional financial systems or for illegal activities.

- Centralization: Many stablecoins, such as USDT and USDC, depend on centralized issuers, meaning users must trust these companies to ensure token backing and regulatory compliance.

- Backing risks: Fiat-backed stablecoins can face trust issues regarding the reserves that back them. Tether, for example, has been criticized for lacking transparency about its reserves.

- Algorithmic risks: Algorithmic stablecoins, as shown by the TerraUSD collapse, can be unstable and vulnerable to systemic risks, especially during periods of high market stress.