The benefits of using stablecoins for trading

There are numerous benefits of using stablecoins for trading. Stablecoins are generally pegged to a currency, such as the U.S. dollar, a commodity, such as gold, or another type of financial instrument. Given the generally recognized stability of these more traditional assets, stablecoins offer an alternative to the volatile crypto market. As a tool in the trading sphere, stablecoins can be used to quickly hedge against market volatility, provide a stable base currency for trading pairs, and facilitate trades between exchanges. Beyond trading, stablecoins also integrate seamlessly with decentralized finance (DeFi) platforms, allowing traders to lend, borrow, and earn interest, further enhancing their utility in the crypto sphere.

In this article, we take a closer look at the benefits of using stablecoins for trading and other ways in which stablecoins are used within the broader cryptocurrency ecosystem.

What are stablecoins?

Stablecoins are essentially cryptocurrencies whose value is linked to another asset, such as a currency, commodity or financial instrument. Being pegged, or tied, in this way ensures the maintain a steady and stable value —hence their name— and avoid large fluctuations in price experienced more commonly by other popular cryptocurrencies such as Bitcoin or Ethereum. 

Given this stability, stablecoins are often used for moving funds between the digital and traditional currency spheres, and for creating a digital reserve to be used for trading. They are also the ideal digital currency for routine transactions, offering the speed, low fees and global reach of cryptocurrencies without suffering from the same level of volatility. One of the most well-known stablecoins is Tether, whose value is pegged to a stable asset, the U.S. dollar.

Using stablecoins for trading

Stablecoins were designed as a crypto asset with much lower volatility that larger cryptocurrencies, such as Bitcoin or Ethereum, in order to make payments. Unlike these other cryptocurrencies, stablecoins maintain a steady and stable value as they are hedged to stable real-world assets, such as FIAT currency or gold. In trading, this reduced volatility is also hugely significant. Using stablecoins for trading provides traders with a reliable base currency, making it easier to hedge against market fluctuations quickly and effectively. 

Traders can also leverage stablecoins to facilitate seamless trades between cryptocurrencies without having to convert them into FIAT currencies, which helps bypass extra fees and wait times. This speed and efficiency allow traders to move their assets swiftly, reacting to market movements and taking advantage of opportunities as they appear. With the crypto market operating 24/7, stablecoins also offer round-the-clock access to a stable asset, enabling improved risk management and greater flexibility for executing trading strategies.

Regulations on stablecoins

Stablecoins suffer continuous scrutiny from regulators due to their rapid market growth and potential impact on the traditional financial system. In 2021, the International Organization of Securities Commissions (IOSCO) proposed that stablecoins be regulated in the same way as financial market infrastructure, focusing on those stablecoins considered “systemically important.” In the U.S., some politicians, such as Senator Cynthia Lummis, have also suggested tightening regulations on stablecoins in the form of regular audits of stablecoin issuers.

In Europe, the Markets in Crypto Assets Regulation (MiCA) came into effect in 2023, essentially banning algorithmic stablecoins and mandating that other stablecoins must be backed by assets held by a third party. These reserves must be liquid and maintain a 1:1 ratio with the coins issued, ensuring greater transparency and stability in the stablecoin market.

Trading with stablecoins on Limitlex

In order to trade with stablecoins on Limitlex*, you first need to create an account. Then, once your account has been verified, you will need to deposit funds —a minimum of €100— in order to start trading with stablecoins. Select the desired market or trading pair, then select the ‘Buy’ option and specify the amount of currency you wish to spend. Then click ‘Buy’. We encourage all our traders and investors to activate two-factor authentication on their accounts for an extra level of security. 

To activate two-factor authentication, head to ‘My Account,’ and click on ‘Two-Factor Authentication (2FA)’ then on ‘Set 2FA’. You can set up 2FA using an application or via SMS. Once you have chosen your preferred option, follow the instructions provided. When you are ready to withdraw funds from your Limitlex account to your personal bank account, simply go to “Deposit/Withdrawal” and then choose “EUR” in the drop-down menu. Then click on the “Add IBAN account” and fill in your information. After you've added the account, simply select it and enter the amount you wish to withdraw.

For more information on using stablecoins for trading, how to use Limitlex, or to open a trading account with us, visit www.limitlex.com. 

*Please note that Limitlex is only available to traders located in Europe.