The main disadvantage of cryptocurrency is its high volatility. Blockchain technology is just evolving, digital asset markets are too small to withstand various factors affecting token prices. High risks make cryptocurrency an unsafe investment asset.
Stablecoin (stablecoin) is a type of digital asset characterized by high rate stability. It is ensured in different ways:
- linking to fiat currency – dollar, euro, yen;
- linking to cryptocurrency – smart contracts are used for blocking the number of digital assets and receiving stablecoins;
- the use of algorithms that control the issuance of tokens depending on the value of the fiat currency.
Stablecoins are often used for speculation, and investors see them as the base currency. Other investors buy them for savings. But often this done with the aim of speculation, in order to quickly enter a position, or exit a position, fix profit/loss, etc.
The main risks of stablecoins:
- exchange rate risks of fiat currency that are used to ensure digital assets;
- not all payment systems accept stablecoins;
- there are risks of manipulation of the rate of the stablecoin itself.
Top 6 stablecoins
The most popular stablecoins are Tether (USDT), Binance Stablecoin (BUSD), Gemini (GUSD), Coinbase (USDC), TrueUSD (TUSD), Huobi USD (HUSD). Let’s take a closer look at each digital asset.
Tether Stablecoin: USDT
Tether is dependent on the US dollar and is the most popular stablecoin in the world. It was released in 2015 by a company of the same name. First, the Omni Layer platform (an add-on over Bitcoin) was used for emission and processing. Several years ago, this project also added the Ethereum platform and releases its tokens on ERC20. And more recently the Tron blockchain (TRC20) was also involved.
Tether’s market cap has exceeded $36 billion (1). The closest competitors are very far from the leader; the capitalization of each of the pursuers is just billions or even hundreds of millions of dollars.
But there was a serious scandal with USDT. The result of such an incident was terrible – the value of the token fell to 85 cents at some moment (usually, its price is equal to 1 dollar). The essence of the scandal boils down to accusations of fraud, the lack of the required amount of dollars to back the issued coins with fiat currency. Nevertheless, the capitalization of Tether is still growing.
Binance Stablecoin: BUSD
Binance Stablecoin is a joint project of a well-known cryptocurrency exchange and Paxos developer. BUSD is dependent on the main fiat currency, the US dollar. This digital asset has recognition by one of the official bodies of the United States – the New York State Financial Services Authority. This happened very rarely in the blockchain world.
The purpose of the Binance stablecoin is the free movement of money between traditional currencies and digital assets. BUSD appeared recently, in October of 2019. You can buy cryptocurrency on the website of the parent company or on the exchange of the same name.
The main risk associated with BUSD is its youth. The project is still developing and it is difficult to predict stability in the future.
Gemini Stablecoin: GUSD
Gemini Dollar is a joint product of the company of the same name (owned by the famous Winklevoss brothers, cryptocurrency billionaires, and investors) and the New York Trust. The stablecoin is based on the US dollar at a 1:1 ratio. It is also based on the Ethereum blockchain, and GUSD complies with the ERC-20 standard. Cryptocurrency can be stored on any Ethereum wallet.
Gemini Stablecoin was created as an alternative to the # 1 stablecoin – Tether. The accuracy of the correspondence of the issued coins to the number of dollars on the accounts of the issuing company is guaranteed by the auditing company BPM Accounting and Consulting (Reports).
The cryptocurrency is controlled by the New York State Financial Services Authority. The Gemini digital asset is within US law competence.
The control by the official fiscal authorities implies stability and security but contradicts the main idea of cryptocurrency – decentralization.
Coinbase Stablecoin: USDC
Another digital dollar, which is a joint product of the well-known cryptocurrency exchange Coinbase and Circle. We are talking about USDC (Coinbase Stablecoin). The whole Center consortium was created to make this stablecoin, and it maintains a balance of $1 per coin. The asset is based on the Ethereum blockchain, and the ERC-20 token is used.
Today, the capitalization of the USDC is $9.3 billion (3). All operations with the token comply with the requirements of US law. The correspondence of the declared cryptocurrency rate to the dollar is controlled by the accounting company Grant Thornton.
The strong centralization of USDC goes against the main principle of the blockchain – decentralization and such feature is negatively perceived by the crypto community.
TrueUSD is a cryptocurrency, belongs to the category of stablecoins, it is the second after Tether. Stablecoin was created by Trust Token to compete with USDT. Ethereum blockchain and ERC-20 tokens are used here too. TUSD is dependent on the US dollar. The issuing company guarantees the full backing of the issued tokens by fiat currency. The financial resources of several companies are used at once for this. And audits with public reporting are carried out monthly.
Compliance with standards, US legislation, and technical regulations is a kind of guarantee of liquidity of the TUSD stablecoin. The developers of the Trust Token cryptocurrency are not involved in any transactions with assets. This is done by banks and trust companies.
Huobi USD: HUSD
Huobi USD is a stablecoin dependent on the US dollar at a 1:1 ratio. The HUSD is issued by Stable Universal. Huobi USD also uses the Ethereum blockchain (ERC-20 token).
The guarantee of the ensuring of tokens with fiat currency is a monthly report of the independent auditing company Eide Bailly (4).
How safe are stablecoins for storing digital assets, or investments?
Today, many serious concerns are raised by the statements of the central banks of the leading countries of the world about the unacceptability of issuing cryptocurrencies that pegged to national fiat currencies. Such an issue is absolutely beyond the control of central banks and can lead to the transfer of control over economic processes to third parties. The result is the desire of central banks to develop national digital currencies fully controlled by the issuing state.
The risks are associated with the intransparency of some issuing companies – many of them are registered in countries that are loyal to cryptocurrency (the British Virgin Islands and others). As a result, the company can simply disappear, and investors will lose their money.
Litigation with the Bitfinex exchange, which is directly related to Tether, in the worst case, could lead to the delisting of USDT by cryptocurrency exchanges.
A complete ban or cancellation of stablecoins will not happen, this market is too big. However, there are certain risks and they must be taken into account when you choosing investment instruments.
FOBS Asset Management can help you in the world of digital assets. We will choose the optimal stablecoin portfolio for you: the main task for us is always the same: the safety and minimizing the risks of our partner to the lowest possible.
In our business, we consider stablecoins as the base currency. So, the profit/loss (P/L) of our capital partner will always be transparent and pegged to fiat currency. The base currency of our investor is protected from cryptocurrency volatility (those coins that are not stablecoins).