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How Do Silver-Backed Stablecoins Work?

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Silver, one of the most popular investments in human history, is evolving with the times. Cryptocurrency is making its way into the investment space, and thanks to something called stablecoins, you can use them to invest in silver, gold, fiat, and other physical commodities.

This forward-thinking technology makes traditional investments more accessible to new and experienced investors alike. But many might wonder just how they work. In this post, we’re going to tell you.

What is a Silver-Backed Stablecoin?

A silver-backed stablecoin is exactly as it sounds – a cryptocurrency tied to the value of silver. The value of most cryptocurrencies are tied to the power it costs to validate transactions. Bitcoin, for example, is backed by the electricity that computers use to mine it.

Stablecoins are much simpler. As mentioned, they’re tied to physical currencies. A silver-backed stablecoin is directly tied to the value of silver at a 1:1 ratio. If you buy one, like SilverCoin, you’re essentially buying ownership of silver.

Only, instead of purchasing the bullion or coins sent to your house, you’re investing in an easier way to manage the asset. There are no additional shipping or storage fees, as you’re managing the silver digitally. That and a silver-backed coin often allows for purchasing fractionalized amounts of 1/100th of an ounce. This way, people who can’t afford a whole bar of silver can still invest.

In fact, as is the case with many cryptocurrencies, some silver-backed stablecoins allow you to buy anonymously. For privacy’s sake, this is a massive plus. Plus, there’s none of the paperwork to sign that comes with traditional silver purchases.

Note that by increasing the accessibility of silver, the price is likely to go up as a result. We already know silver is here to stay, at least for the foreseeable future. Like gold, silver has too much of a history to just disappear. Knowing this and making it easier to invest is great for the asset’s long-term development.

What to Know Before Buying Silver-Backed Stablecoins

Know that you know how silver-backed stablecoins work, it’s important to consider a few things before buying them. For one, do some research into an exchange before you buy. Ensure the platform provides a way to check the stored silver – be it via a video feed or third-party audits.

Know that the exchange is legitimate and not selling a fake asset to scam you. Opt into all extra security features like two-factor authentication for account privacy. Finally, check which blockchain these assets are built on. Most are ERC-20 tokens on the Ethereum blockchain network, which makes them fairly reliable. Ethereum employs smart contracts, essentially automated if-then statements. These make it so that your silver-backed stablecoin is automatically and securely placed into your possession without an intermediary like a bank.

Silver-Backed Stablecoins vs. Other Cryptocurrencies

As mentioned, a stablecoin is backed by a physical asset. Its value is designed to be stable, combating the volatile nature of Bitcoin and other cryptocurrencies. The idea is to make crypto investments a little more accessible, serving as a risk-free version of blockchain-based assets.

However, there are some inherent downsides to this. For one, if the value is tied to a physical asset, that cryptocurrency doesn’t change much in terms of profit. Some hear the term cryptocurrency and think they can profit big in the short-term. That’s not the case with stablecoins. While they’re inherently less risky, that also means they’re much less likely to drastically change price.

If anything, silver goes against the traditional market. Its price rises as the stock market falls. This means a silver-backed stablecoin will do the same thing. There might be some correlation to other cryptocurrencies, considering they’re generally seen as safe-haven assets like precious metals. Just be aware of these factors before making an investment.

 
Image by tookapic from Pixabay

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