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February 10, 2022

What are Stablecoins?

What is a Stablecoin?

A stablecoin is a type of cryptocurrency that ties its value to another traditional asset or reference. One of the most common currencies is USDT, also known as Tether, is tied to the US dollar. This means it is impossible for the asset to function with high-volatility like so many other coins or stocks.

These coins are an important staple of the cryptocurrency environment. Lots of users who partake in stablecoin investing will do it to generate passive income, through the high-yield interest form known as staking.

As the yield for these coins continue to crest higher and higher on some platforms, banks and other financial institutions are beginning to worry that a portion of their business will certainly be stolen by this digital asset class. In fact, a well known FDIC-insured savings app known as “Yotta” just began allowing users to place their assets in to “crypto” buckets, essentially doubling their savings yield as they allow Yotta to take advantage of these high-yield assets on the corporate level.

Different Types of Stablecoins

There are four main classes or types of stablecoins that currently exist within the crypto environment. Those types are Fiat-collateralized, crypto-collateralized, commodity-backed, and algorithmic coins. The most popularly backed type is the fiat-collateralized. As noted about USDT, crypto coins that are tied to traditional fiat provide low-risk, sometimes high-yield investing that allows investors to de-risk during times of uncertainty. Transaction fees with these coins are usually minimal as well, allowing you to hold these as a solid baseline before transferring them into other coins you may become interested in.

What are the risks of stablecoins?

As the vast majority of these coins are tied to traditional fiat, it can raise concerns whether or not there is actual backing for these assets. In 2021, the Commodity Futures Trading Commission issued an order and settled charges against Tether Holdings for misleading investors about the size of its backing during trading. Though you can generally feel fairly safe with these lower-volatility coins, you still have to exercise caution before placing your money and investing into assets such as these, like anything else.

There is also congressional unrest surrounding the idea of these stablecoins. In fact, many senators fear that a growth in this particular market could lead to large issues for the traditional financial market. As we see interest rates continue to rise within the crypto and stablecoin economy, while the US economy is fairly uncertain, there is a big question surrounding the efficacy of these markets and its continued use.

However, as discussions continue it begins to show that senators are open to this new web3 world and its implications on today’s economy. The biggest question left unanswered is exactly how to regulate it. The crypto economy was mainly created for the decentralization of traditional finance. That being said, the leading members still understand that regulations are necessary to make sure that the platforms continue to grow and continue to see worldwide adoption and accessibility. It is still unclear at this time which government body will regulate it within the US, but other major countries are already taking a fairly hands-off approach to this industry.

In order to mitigate risk, Decentralized Financial companies are starting Crypto mutual funds that operate similar to how they would in the traditional stock market, only this time within the cryptocurrency scene.

How are stable coins taxed?

Stablecoins are viewed and taxed just like any other stock or property. A gain on the asset’s cost basis will result in capital gains, while a loss would be accounted for similar to a downfall in a stock that was invested in. For these types of coins, it is not very common for someone to make a large profit off of the increase or decrease in the coin's baseline price. However, these assets as stated before are used primarily for staking and garnering high-yield interest for portfolios. Any additional assets that you receive due to the staking of these coins can be reported as income, though guidance is still unclear from the IRS.

Crypto Taxes

If you do decide to jump into this brand new world, and maybe even pick yourself up some tokens, you need to make sure that you have the proper tools on hand to help you manage your financial accounting needs. One of the best solutions for you will be Ledgible.

With Ledgible, it will help you report and keep track of your crypto transactions with the supported integrations as you dive in to the crypto space with this new information. If you want to learn more about Ledgible and get started for free, click here.

Disclaimer: The author and Ledgible do not provide investment advice and nothing in this article is meant to be taken as such. This website is presented solely for informational and entertainment purposes and is not to be construed as a recommendation, solicitation, or an offer to buy or sell / long or short any securities, commodities, cryptocurrencies, or any related financial instruments.

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