Key points

• Stablecoins are different from other cryptocurrencies
• They're backed by another asset, often a more traditional one
• Stablecoins are far less susceptible to market moves due to their backing
• Investors can still earn returns from Stablecoins through various platforms

It's been a tumultuous past few months for cryptocurrency. The market has seen wild fluctuations in value, with Bitcoin (CRYPTO: BTC) and other digital currencies plummeting in price. However, one sub-category of digital currencies has been largely immune to the cryptocurrency bloodbath: Stablecoins.

In this article, we will explore the unique characteristics that set Stablecoins apart from other cryptocurrencies.

What are Stablecoins?

It turns out the wild, wild world of crypto is not completely consumed by volatility. Indeed, even the speculative landscape of cryptocurrency demands a need for stability. Perhaps more so than traditional assets.

The solution… Stablecoins.

Put simply, Stablecoins are cryptocurrency tokens that have been pegged to another asset with a more stable value. To date, most Stablecoins have been backed by either a fiat currency or a cryptocurrency.

In other words, the value fluctuates in tandem with the value of a 'steady' asset. The largest Stablecoins in the world by market capitalisation all use the United States dollar as their reference point.

USD Coin (CRYPTO: USDC), for example, is pegged to the US dollar and each USDC token is supposedly backed by a real-world dollar held in reserve. Other notable examples include Tether (CRYPTO: USDT) and Dai (CRYPTO: DAI).

While many of the above Stablecoins are fiat-backed, there are other options open to investors. For the more decentralised-desiring crypto enthusiasts, Stablecoins also come in crypto-backed and algorithmic forms, removing the link to central banks.

How do they differ from other cryptocurrencies?

The key difference between Stablecoins and other forms of cryptocurrency is that they are not beholden to the whims of the market.

Their stability makes them attractive to many cryptocurrency advocates, as they can safely store their money in Stablecoins without fear that their value will fluctuate significantly. But they still offer most of the benefits associated with cryptocurrency.

While the removal of the downside risk is appealing, keep in mind the upside is no longer present. However, crypto users can take advantage of attractive yields offered on Stablecoins across various platforms at their discretion.

Unlike traditional cryptocurrencies, this is one of the only ways to accrue returns while holding the token.

The post What are Stablecoins and how do they differ from other cryptocurrencies? appeared first on The Motley Fool Australia.

The cryptocurrency market keeps expanding and that means a lot more choices for investors looking for exposure in digital currencies. Risk is inherent in all types of cryptocurrency, but there are some denominations that should hold up better on a relative basis. 

Bitcoin (CRYPTO: BTC), Ethereum (CRYPTO: ETH), and USD Coin (CRYPTO: USDC) are my three largest personal investments in the cryptocurrency space. They also happen to be my top choices in terms of limiting the unusually high risks that come with the wild price swings for the market. 

Bitcoin

The world's best known cryptocurrency is Bitcoin, and understandably so. It's the one that put digital currencies on the map. With a market capitalisation of $1.1 trillion, it is more valuable than the next 40 cryptocurrencies combined. If Bitcoin were a stock there would only be five US publicly traded companies commanding larger market caps.

Bitcoin is the industry standard. Some companies are converting some of their cash reserves to Bitcoin, and a growing number of financial platforms are allowing their customers to trade in the top dog of digital currencies. 

There are risks, of course. Bitcoin has been susceptible to sharp spikes and plunges. We've seen it happen this year. Bitcoin peaked in April, only to shed more than half of its value by June. It would go on to more than double, hitting fresh all-time highs earlier this month. If this is the kind of volatility that scares you away, you're not going to want to hear that it has had even bigger crashes in the past. Bitcoin has always bounced back, but that's obviously not a guarantee of future performance. 

Bitcoin is also coming under fire this year for the vast amount of energy consumed in mining for the crypto as a proof-of-work platform. It's also expensive to transfer relative to some more nimble digital currencies. It's not perfect, but it's the default crypto as long as it sits atop the market cap throne.

Ethereum

The world's second-most valuable denomination -- with a market cap just above $500 million -- is Ethereum. Despite commanding less than half of Bitcoin's value it overtook the top dog as the most traded crypto on Coinbase Global in the last two quarters.

Ethereum's blockchain tech has the superior functionality when it comes to use cases beyond being merely a store of capital. Ethereum has become a popular choice for decentralised applications -- dApps -- for gaming transactions, advertising, and non-fungible token bidding wars. Bitcoin's recent Taproot update will help it close the gap on some fronts, but Ethereum's already looking ahead to its next major transformation.

Ethereum is migrating away from proof-of-work to proof-of-stake, a shift that will make the world's second-most valuable crypto even more energy efficient when it comes to generating new tokens but also help speed up transactions and related costs. 

USD Coin

Picking a stablecoin as my third choice for risk-averse cryptocurrencies may not seem fair, but it certainly makes the cut as a digital currency. Coinbase created USD Coin -- more commonly referred to as USDC -- and the leading trading exchange stands by it as coin with a price locked at $1 and pegged 1-to-1 with the US dollar. 

Why would you want to own a crypto locked at $1? Coinbase only offers a 0.15% yield on traders holding the stablecoin, but there are far better alternatives elsewhere if you're willing to risk it on another app that will lend, stake, or otherwise use your USDC. Platforms like Celsius Network currently pay more than 10% on USDC. Voyager is rolling out a debit card where you can earn 9% interest on your USDC until you use it for purchase. 

Chasing yield on USDC is riskier than just parking it on Coinbase or in a crypto wallet and even if you're OK with just earning 0.15% on Coinbase, you are at the mercy of the platform's financial viability. It's still a low-risk crypto with a decent $37 billion currently in circulation. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Here are my top risk-averse cryptocurrencies appeared first on The Motley Fool Australia.