For better or worse, globalization is here and the traditional means of receiving payments in foreign currencies has become obsolete. Whether you trade in international markets, own a small freelance business, or run a multi-million dollar company that deals with clients from various countries, your payments are always subject to forex risk.
Forex—or foreign exchange risk—is the loss you may incur on your total payment due to the fluctuations in the relative value of a foreign currency and your domestic currency.
For example, if you're European and working with a United States business, the Euro equivalent you receive in your account each time for the same payment amount in the U.S. dollar may differ depending on the currency exchange rate at the time of payment.
Similarly, if a European investor were to buy stocks in a U.S. based company, they might have to pay different amounts on different days due to fluctuating currency exchange rates, even if the stock’s price remained steady.
This has been a longstanding issue for both businesses and individuals. But there are a number of ways to mitigate forex risk. Specialized ETFs, forward contracts, options, and a contract for difference (CFDs) are some options. The problem is that these solutions are more appropriate for businesses and individuals savvy with trading and investment products.
For someone who is just starting out business—or for anyone who prefers a simple straightforward solution, these tools are arguably not the best option.
But it's 2020 and there's a new wave of financial technology, powered by digital currency. With cryptocurrency, it's easier than ever to effectively avoid forex risk.
Stablecoins as a Tool to Hedge Forex Risk
Stablecoins are digital currencies that have gained immense traction in recent months due to their resistance against price volatility. While stable tokens are used today by a relatively small community of people interested in the digital currency and blockchain space, they're an incredibly promising tool for conventional use. Recently, mainstream players like Visa have endorsed stablecoins as a "promising new payment innovation."
Paul Razvan Berg, the founder of Sablier, a real-time finance decentralized application, told us he has been using stablecoins as a hedge against forex risk since he started working with foreign businesses.
Working with people and businesses from around the world comes with an obvious question: how do you want to be paid? And let’s be honest here, most financial services—be it wire transfer or internet services such as PayPal—are terrible with exchange rates and transaction fees. In many cases, the exchange rates on online payment platforms may differ by as much as four to five percent when compared to the actual market rate.
With such inadequate exchange services from other financial service providers, stablecoins are your best bet, whether you own a small business or head a multinational corporation.
By choosing to transact in stablecoins, you can receive payments from clients anywhere in the world without having to worry about the immediate exchange rates. You can then utilize any of the centralized or decentralized digital currency exchanges to swap your stablecoins for your domestic currency at the most suitable time.
Besides, getting paid in stablecoins means that the transaction fees are virtually zero, as opposed banks and other service providers that typically charge as much as five to ten percent. Ouch.
By taking advantage of stablecoins for payments, you’ll be able to keep more of your hard earned revenue.