Stablecoins are a particular category of cryptocurrencies, having the caracteristics of being pegged to a (supposed) “stable” asset, such as gold or a strong fiat currency. They usually have a fixed valuation in relation to their underlying asset. Tether (USDT) is the most famous stablecoin. It is backed by the US dollar, with a stable value of USD $1 for each USDT token. The main advantage of stablecoins is their value stability, unlike the high degree of volatility which affects typical cryptocurrencies, such as Bitcoin. Furthermore, while the cryptocurrency market capitalization can observe double-digit daily variations, stablecoins capitalization keep their value constant, relative to the underlying assets.
There are many categories of stablecoins. The most famous are the following: asset-backed stablecoins, commodity-backed stablecoins, fiat-backed stablecoins and crypto-backed stablecoins.
Asset-backed cryptocurrencies are stablecoins stabilized by underlying assets, whose prices are not correlated with the cryptocurrency business. In other words, the underlying asset is not correlated with the crypto industry, and this lack of correlation helps reducing their financial risk of this category of cryptocurrencies. Since Bitcoin and altcoins are highly correlated, traders can avoid widespread price variations by buying asset-backed stablecoins. Furthermore, asset-backed stablecoins allow a trader to redeem the asset/s which back them, and so they cannot fall below the value of the underlying physical asset, due to the arbitrage principle.
The volatility and risk levels of these category of cryptocurrencies is associated with those of the backing asset. If they are backed in a well-managed decentralized way, then they can be considered relatively safe from predatory actions, although the risk of theft cannot be completely excluded a priori.