These crypto-assets maintain stability through collateralization or smart contract mechanisms that automatically reduce or increase supply depending on market conditions.

In contrast to other cryptocurrencies like Bitcoin or Ethereum, many stablecoins are issued by a central authority that maintains the reserve asset. Some argue this process makes stablecoins too centralized – and point out how the virtual currency world should be focused on decentralization. Others claim a central authority is needed to ensure there is enough of the reserve asset to properly back each coin. 

As stablecoin prices rarely (if ever) fluctuate, many wonder how their issuing authorities make money and sustain operations. Keep reading to learn a few different ways stablecoin companies bring in money. 

Attracting Attention To Lure Investors In

Stablecoin companies have many bills to pay. They have to fork over cash to ensure the development team is properly compensated. As a result, some entities that issue stablecoins use the crypto asset as a tool to entice investors to fund other lucrative products and projects. 

Token COO Todd Clyde remarked how his company, which maintains its own stablecoin, received venture capital attention due to the potential profit of cross-border payment services. 

A financial system (the cryptocurrency world) that can offer lower fees and faster processing times than banks is an enticing opportunity for potential investors. As a result, some stablecoin companies simply utilize their coin to provide added value to other work and raise awareness for future investment, helping the entity raise money. 

Basecoin (associated with Basis Protocol) has raised tens of millions of dollars from venture capital (VC) investors. Some of these investors see a stablecoin like Basecoin as a good fiat on-ramp to help cryptocurrency banks boost trade volume and activity. 

Fees On Issuance And Redemption

Some stablecoin companies, like Tether, levy fees for issuing and redeeming their coins. Fees can become lucrative as stablecoins are seen as a key ‘on-ramp’ for those new to the cryptocurrency world. The asset is perceived as a safe way for investors to expose their portfolios to cryptocurrencies, meaning revenue from fees can rapidly rise as demand increases. 

However, stablecoin companies often are careful with their fee structure to promote arbitrage opportunities by keeping the spread between the coin price and collateral higher than the fee. 

Capitalizing On Short-Term Lending Opportunities 

Stablecoin companies also maintain the option to invest a portion of base collateral in the money market and treasury funds. This strategy can prove much more lucrative than charging fees, as one-month treasury rates have maintained a 1.24% long term average. A few years ago, rates jumped over 2%, a far cry from 2021 numbers where the rate is below 1%. 

While making money based on the interest on reserve assets is a possible strategy, complexities with the banking situations of some stablecoins can make it challenging to do so. 

Market-Making Activities 

Carrying out market-making activities on exchanges is another strategy for stablecoin companies to make money. Profit can be made based on the bid/ask spread and exchange volume. 

These factors vary based on the exchange and current trade volume. This process is not as financially lucrative as other options. Still, it can serve as a way to make a small amount of money while carrying out necessary processes to keep a stable coin ecosystem running smoothly. 

The Popularity Of Stablecoins Only Grows 

The number of stable coins only grows as crypto holders turn towards the asset to protect portfolios and hedge against inflation. Currently, fiat-backed coins dominate the market as people are comfortable with currencies like the U.S. Dollar and British Pound. 

However, speculation is that the growth of dApps and decentralized exchanges will lead to the rise of crypto-native stablecoins that will eclipse fiat-backed options in popularity. Crypto-native coins like Dai offer value-sharing opportunities and protection against censorship that are not found with fiat-backed options. 

Final Words

Overall, stablecoin companies function as money creators and now represent a competition between creative teams who can capitalize on the upside and create ‘useful’ cash for global populations to take advantage of. 

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Stablecoins are also proving popular as decentralized finance (Defi) continues to expand and gain influence.

The vast majority of stablecoins are fiat-backed. Many, like Tether’s USDT, are backed by traditional currency. A growing number, like Platinum Coin and Gold Coin, maintain precious metals as a reserve currency. 

Precious metals like gold, silver, platinum, and palladium have long been prized by investors. Physical bullion is liquid, prized for its beauty, and has served as a stable store of value for generations upon generations. 

Cryptos backed by precious metals attempt to bridge the gap between the traditional and digital financial world. They provide investors the opportunity to diversify into digital assets and then redeem virtual coins for physical bullion at any time.

There is a wide array of cryptocurrencies backed by precious metals on the market. It can be hard to distinguish legitimate projects from more questionable ones, as many make bold promises and can be vague about important elements. 

Top cryptocurrencies that are backed by precious metals

Here is a list of top cryptocurrencies backed by precious metals. Any of these coins are legitimate investment opportunities available for any interested buyer. 

Gold Coin:

Gold Coin represents the first time a fractionalized gold-backed asset can be purchased with other digital currencies or fiat. This democratizes access to gold and opens up investment opportunities for a wider range of people. Gold Coin is built on the Ethereum blockchain and presents a seamless process for people to easily redeem for 99.9% physical gold bars, rounds, or coins.

Perth Mint Gold Token:

Perth Mint Gold Token is one of the most well-known gold-backed cryptocurrencies on the market. The cryptocurrency is the first digital gold token backed by gold guaranteed by a government. Each coin has bullion in reserve from the Perth Mint, managed by the Australian government. Digital coins are issued by InfiniGold and are backed officially through mint-issued GoldPass certificates. Holders are able to research and specifically see the bullion backing their coins, giving the project a great deal of legitimacy.

Platinum Coin:

Platinum is one of the rarest metals on earth, and buying Platinum Coin presents investors with opportunities to purchase the metal highly desired for its reflective nature and electrical conductivity. Platinum Coin is backed up by secure bullion reserves that undergo regular reviews and are stored in a room with a camera, so holders of the cryptocurrency can view reserve assets at any time.

Silverlink:

This cryptocurrency is a leading option for investors eager to take advantage of silver bullion’s low spot price. Each coin is equal to one gram of 0.999% certified silver. Bullion is acquired once an investor places a link on the Silverlink website. Silver is purchased after reviewing spot prices across markets in Australia, China, Peru, Russia, Mexico, and Chile. A Silverlink token is mined via a smart contract once bullion backing is confirmed and a vault receipt is received. Silverlink is built on the Ethereum network and the unique aspect of the coin makes it an enticing investment.

Paxos Gold:

PAX Gold was launched in 2019 by the technology company Paxos. The gold-backed cryptocurrency is unique as it is a U.S. based company that has received approval to operate from the New York State Department of Financial Services. This approval gives the cryptocurrency a great deal of legitimacy due to the myriad of financial laws in the United States. PAX Gold is an ERC-20 coin based on the Ethereum blockchain. A variety of popular wallets, including MetaMask, Trezor, and Ledger, support storage of Paxos Gold

Evaluating Cryptocurrencies Backed By Precious Metals 

Investors should do their due diligence before investing in coins backed by precious metals. Some do not have the proper amount of reserve assets, meaning the coin could potentially become entirely worthless. Others make the physical redemption process very difficult.

Those interested in buying cryptocurrencies backed by precious metals should make sure the coin in question has audits performed by a reputable third party to ensure there is enough bullion backing. Projects with outlandish claims of returns on investment, or prices that just seem too good to be true, should be avoided. 

Investing in precious metal-backed cryptocurrencies gives people an appealing and easy way to include both digital currencies and bullion in their portfolios.