With bitcoin breaking $10,000 again in recent weeks, public interest in cryptocurrency is picking back up. (Full disclosure: Author holds investments in bitcoin.) But one thing that keeps some people on edge about crypto is volatility. With all their price swings, cryptocurrencies are still seen by some investors as just too risky. Stablecoins offer a way to protect against this volatility.
Stablecoins are cryptocurrencies that are linked 1:1 to a fiat currency, such as the U.S. dollar or British pound. This means that the value of a stablecoin always remains the same as the fiat currency to which it is linked. Since most fiat currencies rarely experience wild price fluctuations, a cryptocurrency linked to them is inherently more “stable” than a regular cryptocurrency.
But why use them in the first place? There are two main benefits to stablecoins: The first is that you get the advantages of a cryptocurrency without the volatility. They offer the stability of a trusted fiat currency like the U.S. dollar in digital form. Most stablecoins are built on top of Ethereum, which means they can be sent and received as easily as any other cryptocurrency. Essentially, this means you can access U.S. dollars without a banking account — something that could be life-changing to millions of “unbanked” people in the developing world.
The second advantage of stablecoins is for people who view cryptocurrencies as an investment rather than something to use every day. For example, say you’re waiting for bitcoin to reach almost $20,000 again, as it did in late 2017. Once it happened, you could swap your BTC for a USD-backed stablecoin like USD Coin, and your $20,000 would be safe from any sudden drops in BTC’s price.
Simply put, stablecoins provide a way to help lock in gains and protect against losses. For this reason, many major exchanges, such as Coinbase and Poloniex, offer trading pairs with stablecoins.
Stablecoin Examples
• Tether (USDT): This is the largest stablecoin by market capitalization and also the most controversial. For years, USDT has been plagued by rumors that it was not fully backed by dollar holdings, which would mean that Tether Limited (the company behind this project) was “printing” digital dollars out of thin air. They’ve also never released audit results publicly, which hasn’t done much to dispel these rumors. More recently, Tether was caught up in a legal case involving a missing $850 million.
The full list of allegations around Tether is too complicated to get into here, but it has caused USDT’s value to briefly fluctuate several times when traders began to lose confidence in it (which remember, is never supposed to happen with a stablecoin). Scandals like this would be enough to bring down most crypto projects, but if there is one thing that stands out about Tether, it is its sheer resilience. Despite the controversy, USDT has always found a way to bounce back, and it remains the leading stablecoin.
• USDCoin (USDC): This one remains a popular option, because it is the only USD stablecoin available on Coinbase. USDC was the result of a joint project by Circle, Inc and Coinbase to build a reliable USD stablecoin that is meant to be easy to use and trustworthy. Every token issued is backed by actual dollars held and is attested monthly.
• TrustToken coins: TrustToken has gained a reputation as a reliable stablecoin provider. Their most popular coin by market cap is TrueUSD (TUSD), which is held in escrow by trust company bank accounts. Holdings undergo monthly attestations, which are available on their website. The company also offers stablecoins linked to the British pound and Australian and Canadian dollars. One interesting thing about their coins is that you can purchase and redeem their stablecoins directly from their website, rather than relying only on exchanges.
Other major stablecoins include Paxos (PAX), Dai (DAI), Stasis Eurs (EURS — it’s linked to the euro) and Gemini Dollar (GUSD), launched by the Winklevoss twins. Binance also just announced it will be launching its own stablecoin in a matter of months, a move that could seriously challenge Tether’s dominance for the first time.
Facebook Enters The Stablecoin Game
Probably the biggest development with stablecoins right now is the announcement of Libra, a stablecoin created by Facebook (it will be run as a separate company). Unlike most stablecoins, which are linked to a specific fiat currency, Libra will be backed by a group of “low-volatility assets, including bank deposits and government securities.”
Some in the cryptocurrency world are alarmed by Libra and not simply because of the privacy concerns surrounding the company in general. Some also object to the technology itself, saying it is not a true cryptocurrency from a technical perspective but that the company is still representing it as such in its marketing.
No matter what you may think about it, Libra will be one of the biggest and most ambitious fintech projects to date, and it could change the crypto landscape when it launches in 2020.
So, How Do You Decide Which One To Use?
Look for stablecoins that undergo regular audits or attestations to ensure they do, in fact, hold enough fiat currency to back up each new token that is generated. Study the price history to make sure there have not been price fluctuations, and if there have been, do some research to find out what happened. Go to their websites, and see how long it takes for deposits to arrive in your bank account.
Generally, the more “boring” a stablecoin project might seem, the better. They’re not supposed to be exciting; a stablecoin won’t take you to the “moon,” but it may help you stay there once you arrive.
One thing is certain — as long as volatility remains a major issue for cryptocurrencies, there will be a demand for stablecoins.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
