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Bitcoin vs. Stablecoin: Key Differences

Introduction

Anyone with an online presence is sure to have come across Bitcoin and other cryptocurrencies. It is interesting to note that Bitcoin is not the only type of cryptocurrency, and it has been around for more than a decade. Bitcoin introduced blockchain technology that gave rise to the entire cryptocurrency market with more than 18000 cryptocurrencies and more than 1000 unique blockchains. Developers used the source code of the Bitcoin blockchain and made different types of cryptocurrencies, such as Stablecoins. In this article, the reader will learn about the key differences between Bitcoin and stablecoins.

What is Bitcoin?

Bitcoin is the first cryptocurrency product that is a coin issued from a blockchain under the same name. Bitcoin is a digital currency which means that it can be used for making transactions and performing other financial functions in place of paper money. Bitcoin has gained popularity among the masses as an investment and a hedge of value. It means that people purchase Bitcoin expecting to make a profit from its price increase in the future. Bitcoin is the only coin issued by Bitcoin Blockchain, and its maximum supply is capped at 21 million coins. 

Origin of Bitcoin

Bitcoin is a blockchain that is a data recording service based on DLT or Digital Ledger Technology. Bitcoin was introduced by a developer named Satoshi Nakamoto. Satoshi Nakamoto is used as an alias for the real creator of Bitcoin, who also published Bitcoin Whitepaper in 2009. Nakamoto has kept Bitcoin Blockchain open-sourced, which means that all developers are free to use the source code and build new projects with it. Bitcoin is also a community-owned project which means that the users on the network can make decisions using the democratic voting method. 

How Does Bitcoin Work?

Bitcoin is a blockchain which means that it allows users to make new transactions on the network using BTC. All the transactions on the Bitcoin blockchain are added to a block that is encrypted with a signature to keep it secure. Bitcoin is a PoW or Proof-of-Work blockchain. It implies that Bitcoin allows miners to solve these encrypted signatures to verify the authenticity of the transactions. Once the transactions are verified on a block, it is added to the Bitcoin blockchain. 

All users present on the Bitcoin blockchain can view all the transaction history on the network and verify it. Bitcoin is like a public database, but it is present on several servers around the world, which means that it does not depend on a single server. The latest copy of the verified block is sent to every server on the Bitcoin blockchain to make the record incorruptible. Bitcoin users who are making the transactions offer miners rewards in the form of transaction fees. Blocks with higher transaction fees are more likely to attract the attention of miners. 

Advantages of Bitcoin

Transaction Security

Transaction security is one of the best features of Bitcoin. Since Blockchains use cryptography and DLT, it is almost impossible to tamper with the transactions. On the other hand, Bitcoin also warrants protection from any type of payment fraud. It is impossible to make an artificial Bitcoin and add it to the network. On the other hand, there are many cases where people are duped with fake banknotes.

Safety from Theft

Bitcoin ensures that no one can assume the identity of another person or conduct business in their name. There are many cases where people who are using digital payment platforms like Debi or Credit cards suffer from theft of their identities. However, even a user who has a pseudonymous account on the Bitcoin blockchain can maintain their accounting records without the fear of getting robbed or changed. At the same time, the personal information about the users also remains private. 

Fast Speed

Bitcoin is a decentralized network which means that it does not need to depend on centralized supervisors. Therefore, all the transactions happening on the Bitcoin network are quickly verified and processed. When a person is using a bank, they need to create an account, submit all their related documents, and wait for getting approval of their application. However, when a person is using the Bitcoin network does not have to deal with any of the above hassles.

Direct Payments

Bitcoin is a peer-to-peer network; it means that purchasing and selling parties can get in direct contact with each other. On the other hand, businesses and retail contractors have to involve third-party payment facilitators when they are making transactions with fiat currencies. Bitcoin blockchain removes the need for any foreign intervention and saves time as well as money for the users.

Liquidity

Bitcoin has gained considerable popularity among the masses over the last decade. Today, it is possible to purchase Bitcoin with any currency around the world. Every single cryptocurrency exchange in the world has listed Bitcoin. Furthermore, the coin is also readily available in the cryptocurrency market for sale and purchase. It means that users do not worry about its liquidity and exchange value. 

Remittance

Bitcoin is an ideal platform for making international transactions. Countries like El Salvador have converted to Bitcoin to make sure that the citizens can save millions of dollars that are wasted on remittance fees every year. With Bitcoin, a commercial or a retail user does not have to go through the hefty process of fulfilling all the documentation for international transactions. Anyone present in any part of the world can send Bitcoin anywhere at any time. 

Financial Independence

Bitcoin is a decentralized network which means that people can join the network with an internet connection and an operating system. Since the Bitcoin blockchain is permissioned, anyone can use the network without needing approval from the bank. On account of this quality, Bitcoin has brought a greater level of financial independence for the users. Unbanked people can join the Bitcoin network. At the same time, those who do not wish to use centralized financial networks can switch to Bitcoin. 

Limitations of Bitcoin

Bitcoin Scams

Bitcoin has often been seen as a get-rich-quick scheme. On account of a lack of knowledge and education, many people are under the impression that it is the easiest and fastest way to convert their savings into profits. However, digital currency trading requires a lot of experience, work, and deliberation. Therefore, scammers take advantage of the people who are not fully aware and lure them into wasting their savings by getting them into financial scams in the guise of Bitcoin. 

Criminal Activity

Bitcoin has become the favorite currency for hackers, criminals, and dark web users. Since Bitcoin allows people to make transactions outside of the purview of centralized governments, therefore a considerable amount of threat actors use Bitcoin to run their criminal syndicates. However, since Bitcoin is a transparent and trusted network all the transactions on the platform are public and traceable. 

Volatility

Bitcoin currency suffers from massive price volatility. It is worth noting that a fiat currency is mainly operational within a single country in most cases. On the other hand, Bitcoin is an international digital currency. Therefore, it is very difficult to estimate its latest price-related ups or downs accurately. However, since Bitcoin carries higher risks, it also comes with a better profit return percentage.

Irreversible

Bitcoin transactions cannot be changed or manipulated under any circumstances. However, it also means that it is impossible to reverse a transaction once it is completed. There are digital platforms like PayPal that allow the users to put the money in an escrow account so that both sellers and buyers have greater transaction security. Meanwhile, Bitcoin transactions are always direct and final. 

What is a Stablecoin?

A stablecoin is a type of crypto that possesses a stable or constant price at all times. Stablecoins are created keeping in view the problem of high price volatility in cryptocurrencies. Digital currency investors can purchase a stablecoin which will allow them to prevent any further loss of value. For example, cryptocurrencies like BTC can lose their value on account of changing market dynamics. However, if an investor opts to purchase a stablecoin X. They will be able to prevent the devaluation of their cryptocurrency savings.

Origin of Stablecoins

The first-ever stablecoin was introduced in 2014, called BitUSD. It was a combined effort of two blockchain developers, Charles Hoskinson and Dan Larimer. BitUSD was issued by a native blockchain named BitShare. BitShare also issued the main coin called BTS. BitUSD value was pegged to the BTS coin.

The project was designed to maintain its collateral with the use of smart contracts. One of the main motivations behind creating stablecoins was to create a cryptocurrency product that is close to USD functionality. It is also worth mentioning that cryptocurrencies like Bitcoin and Ethereum are closer to commodities like gold in nature. Therefore, developers were looking for a project that was able to provide them with something closer to a real fiat currency. 

Types of Stablecoins

Fiat-Collateralized Stablecoins

These are the type of cryptocurrencies that are backed by fiat currency reserves. Some of the popular fiat currencies for backing up stablecoins are GBP, USD, Euro, etc. The ratio of backup reserves is 1:1 for FC stablecoins; it means one unit of stablecoin is backed by one unit of a fiat currency in question. FC stablecoins are the simplest type of stablecoin backing mechanism. 

Commodity-backed Stablecoins

Commodity-backed stablecoins use commodities like gold, silver, metals, wheat, oil, corn, etc., as a reserve. These commodities are interchangeable, and since gold is already an established and highly valued commodity, it is also one of the most common collaterals for CB stablecoins. These stablecoins use the real value of the commodities in question, like cotton or real estate. Since they carry a considerable amount of risk, therefore only high-net-worth and accredited investors use them in most cases. 

Algorithmic Stablecoins

These stablecoins use smart contracts to maintain their fixed market value. An algorithmic stablecoin is essentially a token marked as non-collateralized. Therefore, such type of non-collateralized stablecoins is compared with a digital alternative of seignorage shares. The algorithm uses the forces of demand and supply to determine the value of an algorithmic stablecoin. Since there is no liquidity available for such stablecoins due to a lack of collateral, the holders can lose their entire stash in case of a crash. 

Crypto-backed Stablecoins

Crypto-backed stablecoins are the ones that use cryptocurrencies as collateral. In some cases, a blockchain can also use its core cryptocurrency to back the stablecoin project that is also issued by the same blockchain. Crypto-backed stablecoins are more decentralized in comparison to all other types and have a considerable amount of liquidity available. Users can interchange between collateralized cryptocurrencies and stablecoins depending on their value and usage.

Key Differences Between Stablecoin and Bitcoin

Now that all the key features and functions of stablecoins and Bitcoin have been established, it means that it is time to talk about the major differences between stablecoins and Bitcoins in detail. By understanding the distinctions between stablecoin and Bitcoin, digital currency investors can use both types of cryptocurrencies more efficiently. Here are some of the most important dissimilarities between both blockchain byproducts:

Design

Bitcoin is known as the flagship blockchain that allows users to conduct transactions from one point to another without depending on any centralized financial payment systems. On the other hand, stablecoins are designed to allow users to convert their savings into stablecoins with a view of storing the value of their reserves. Stablecoins can be used for making payments, but they are usually not ideal for such transactions.

On the other hand, blockchain is viewed as a peer-to-peer network that grants users the ability to make secure transactions using cryptocurrencies. Meanwhile, stablecoins are cryptocurrencies that are backed by commodities, fiat currencies, crypto tokens, or other asset classes. 

Classification

Bitcoin is a unique cryptocurrency, and it does not have any direct variants. Other developers can use the Bitcoin blockchain source code and create another cryptocurrency that is very similar to Bitcoin. However, it is classified as a new and unique type of digital currency that is completely distinct from Bitcoin. On the other hand, there are four types of stablecoins depending on the type of collateral system it is using. Each type of stablecoin offers a unique advantage for the users. At the same time, each stablecoin types also offer some degree of limitations. 

Utility

The main objective was Bitcoin was to allow users to get access to an alternative currency network that is independent of the centralized financial network. Over the last decade, Bitcoin gained popularity as a hedge against inflation and a store of value. Bitcoin is also used for investment purposes, and it has become popular as a digital gold in recent times. There are also some derivatives available of Bitcoin, such as Bitcoin ETFs, etc.

On the other hand, stablecoins are primarily used to allow investors to prevent the impact of the sharp changes in price decline for their cryptocurrency reserves. During downtime, investors can convert their cryptocurrency reserves into stablecoins. At the same time, stablecoins are also useful for making payments and other financial functions.

Storage of Value

Bitcoin allows investors to make some profits when the market conditions are suitable. It means that an investor can purchase a Bitcoin when the market is down, and the prices are low. And after holding Bitcoin for some time, they can sell it for a higher price when the market enters into another Bull Run citing massive value gains. On the other hand, the default value of stablecoins is always constant. It means that stablecoins do not enable the holder to make profits while they are holding them, and they are only useful for further preventing loss of value. 

The main reason for the differences between stablecoin and Bitcoin is that digital currency investors can make the most of their investments. It is worth noting that when a person holds a stock, they have a chance to make a lot of profit. However, when the stock market is down, the investors should dissolve their position and convert their stocks into cash. This way, they will be able to prevent the loss of their profits. 

In the same manner, when the market conditions are right, investors can keep holding Bitcoin and generate profits from their reserves. On the other hand, as soon as the market conditions start to go the other way, the cryptocurrency investors can pull out their Bitcoin investments and put them into stablecoins to prevent losing their profits. Stablecoins can be very useful in making digital currency trading secure for investors, granted that their utility is fully understood.

Conclusion

Bitcoin and stablecoins are different types of cryptocurrencies that are both useful in their own right. A digital currency investor needs to learn about the positives and negatives attached to both variants. With the proper knowledge about both types of digital assets, digital currency investors can navigate through the market with relative ease and considerable success.


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