The cryptocurrency market is evolving and is trying to mature, and an interesting corner of the cryptos universe is stablecoins. If you do not know much about stablecoins, in this article I will provide some very useful information you should know about them. First, very recently important news was announced about Circle going public via a SPAC (special purpose acquisition company).
According to Protocol.com “The latest sign of the rise of stablecoins is Circle’s announcement of a deal to go public via a SPAC. Circle is the main company behind USD Coin, or USDC, the second-largest stablecoin with a market cap of $25.9 billion, according to CoinMarketCap. The SPAC deal, with Concord Acquisition Corp., values the company at $4.5 billion. Circle and Coinbase back USDC through a consortium called Centre.”
While this is big news for the cryptocurrency market — as was the decision of Coinbase (NASDAQ:COIN) to go public — there is also a lot of scrutiny, disbelief and anxiety about stablecoins from the regulators in the financial and banking system.
News that “Treasury Secretary Janet Yellen pushed top U.S. financial regulators to accelerate their consideration of new rules to police so-called stablecoins, a type of cryptocurrency that’s seen rapid recent growth and remains largely unsupervised” shows that the story of stablecoins has two sides. There’s the obvious one — the cryptocurrency market — and then there’s the regulatory side.
It is also worth mentioning that the Federal Reserve isn’t a fan either. An article on CNBC quoted Fed Chief Jerome Powell as saying, “You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies if you had a digital U.S. currency. I think that’s one of the stronger arguments in its favor.”
Also, Powell mentioned “That doesn’t exist for stablecoins, and if they’re going to be a significant part of the payments universe…then we need an appropriate framework, which frankly we don’t have.”
So is the future a digital U.S. dollar? We will see. But until that day comes, there are stablecoins.
Key Facts About Stablecoins
What are stablecoins? According to Coindesk “A ‘stablecoin’ is a type of cryptocurrency whose value is pegged to another asset class, such as a fiat currency or gold, to stabilize its price.”
These asset-backed cryptos set up a “reserve” where it securely stores the asset or basket of assets backing the stablecoin. To make this as simple as possible, this means that one million units of a stablecoin are tied to $1 million, as most stablecoins have a price of $1 per unit.
The collateral need not only be fiat money, it can be precious metals, other cryptocurrencies, or other investments. As the name implies, stablecoins are used to provide stability in their price and can be used not just for gaining interest or for lending purposes, but purposes such as settlement, escrow, or payments.
Finally, they often offer lowed fees, faster speed, transparency, and the fact that they are programmable.
Are they 100% safe? The answer is no. For several reasons, one of them being the counterparty risk. But they can be interesting.
- Tether (CCC:USDT-USD)
- USD Coin (CCC: USDC-USD)
- Binance USD (CCC:BUSD-USD)
- Dai (CCC:DAI-USD)
- TerraUSD (CCC:UST-USD)
Last price: $1
Market Capitalization: $64.5 billion
Tether says that “Every Tether token is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”). Every Tether token is also 1-to-1 pegged to the dollar, so 1 USD₮ Token is always valued by Tether at 1 USD.”
And you don’t just have to take its word on that. It recently got an assurance opinion validating that it is totally backed. The crypto touts both its security and its transparency to new investors. If you want “Digital money for a digital age” then you can do worse than Tether.
Last price: $1
Market Cap: $27.2 billion
USD Coin is a stablecoin that is pegged to the U.S. dollar on a 1:1 basis. Every unit of this cryptocurrency in circulation is backed up by $1 that is held in reserve, but this is done in a mix of cash and short-term U.S. Treasury bonds. The coin aims to let real-world currencies interact with smart contracts more easily.
The Centre consortium, which is behind this asset, says USDC is issued by regulated financial institutions. It is mentioned that “Centre stablecoins are issued by regulated and licensed financial institutions that maintain full reserves of the equivalent fiat currency. Issuers are required to regularly report their USD reserve holdings, and Grant Thornton LLP issues report on those holdings every month.”
Last Price: $1
Market Cap: $12.2 billion
Binance USD is s a 1:1 USD-backed stable coin issued by Binance (in partnership with Paxos), and is approved and regulated by the New York State Department of Financial Services (NYDFS). The BUSD Monthly Audit Report can be viewed from the official website. Is BUSD secure and stable?
According to the official website, it’s also easy to swap it with specific other stablecoins, saying there are “Zero transaction fee for BUSD/USDT, USDC/BUSD, TUSD/BUSD, PAX/BUSD.” The page also mentions that there is no fee to buy or redeem BUSD.
Last price: $1
Market Cap: $5.6 billion
According to its website, Dai “is a stable, decentralized currency that does not discriminate. Any individual or business can realize the advantages of digital money.”
Dai is based on Ethereum (ETH-USD) and is soft-pegged to U.S. dollars. In the FAQ, the site discusses how the wild fluctuations in cryptocurrency prices can be a bar to using it as an actual currency. As the FAQ says, “Could you imagine having USD or CAD fluctuate hundreds, maybe thousands of dollars in an hour while you are trying to pay rent or buy groceries? You could go from having the appropriate amount of USD for rent of $1200, then suddenly it is now worth $900 dollars.”
This makes the case for stablecoins in clear terms — and the number of use cases for Dai and its peers are astronomical.
Last price: $1
Market Cap: $2,026,911,715
TerraUSD (UST) is the decentralized and algorithmic stablecoin of the Terra blockchain. It is a scalable, yield-bearing coin that is value-pegged to the U.S. dollar.
According to the Terra whitepaper “We have presented Terra, a stable digital currency that is designed to complement both existing fiat and cryptocurrencies as a way to transact and store value. The protocol adjusts the supply of Terra in response to changes in demand to keep its price stable. This is achieved using Luna, the mining token whose stable rewards are designed to absorb volatility from changing economic cycles.”
TerraUSD (UST) is pegged to the price of a dollar and is secured by Terra (LUNA). How this works is that in reality, LUNA is an asset reserve that ensures the stability and security of the UST through the seigniorage process (income received from an emission of money).
Important note. All data is taken from CoinMarketCap as of July 28, 2021.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.