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For readers to know which stablecoin is the biggest and most used, a list of the five most popular stablecoins is provided below.
- Tether (USDT): Market capitalization of about $75 billion
- USDC (USDC): Market capitalization of about $50 billion
- Binance USD (BUSD): Market Capitalization of $10 billion
- Dia (DIA): Market capitalization of $5 billion
- TrueUSD (TUSD): Market capitalization of $1 billion
Is Stablecoin a Good Investment Tool?
Stablecoin can be a valuable investment when it represents a part of one’s digital asset portfolio. However, since their values are constant, they are a different type of investment as opposed to other digital assets (like cryptocurrencies).
2023, Stock Market and Exchange, Investment, Savings, Economy
Which Stablecoin is Good for Investment?
As a good investor, one must seek to know if stablecoin is the best for investment. Every known stablecoin is backed by something, e.g., gold or even another cryptocurrency. In determining which of these stablecoins is good for investment, one must know what is used to back them.
The best type of stablecoin for investment is one backed by a currency, like the USD or EUR.
Secondly, stablecoins backed by commodities are also good for investment, e.g., gold or other valuable metals.
This is good because they create a means of owning gold without having to purchase the physical metal. This is because, in times of crisis, the value of gold usually rises as investors rush to it.
However, stablecoins that are backed by crypto, represent a risky form of investment because the crypto market is very volatile.
Consequently, if the backing crypto crashes, the stablecoin as well will crash. Additionally, these types of stablecoins require overcollateralization when trying to obtain a loan. For example, to get $1 worth of this stablecoin, one will need to provide collateral of $2. Consequently, this makes these types of stablecoins unsuitable for a lot of investors.
Moving on, a more risky stablecoin is backed by algorithms. These stablecoins rely on sophisticated algorithms to maintain their stability.
These types of stablecoins aren’t backed by any assets; therefore, they depend on trust in computer codes. Subsequently, this makes them vulnerable to human emotions (buy or sell) and can be affected by poor fundamentals.
The Dangers of Stablecoins
Firstly, stablecoins may not be fully backed. Such stablecoins are affected by everything. So, in case of panic, if many investors wish to withdraw their coins at the same time, there may not be enough money in the safe for other investors. Therefore, users may lose their money in this case. However, this hasn’t happened to stablecoins that are backed by currencies.
- Secondly, stablecoins can fall below their peg. This may cause a stable’s value to fluctuate a bit around its normal pegged value. For example, a coin worth $1 may cost $1.05 or $0.95. Technically, this occurs in algorithmically backed Stablecoin, as codes cannot handle human emotions.
- Thirdly, the government can issue a regulation that affects the stablecoin. Likes pronouncing Stablecoin as illegal or places heavy taxes on them in an attempt to eradicate them. However, this risk doesn’t always get a lot of attention, as investors will still be able to withdraw their funds. Be that as it may, some panic will still erupt when the government takes this kind of action against a stablecoin.
- Lastly, inflation is another risk that doesn’t always get much attention among cryptocurrency nerds. When an investor invests in a currency-backed stablecoin, they are indirectly investing in the backing currency. So, if he or she earns an interest rate of 6% and backing currency experiences inflation of 8%, such an investor will lose 2%.
To Investors
Stablecoins are both useful investment tools for investors and a very important part of the cryptocurrency ecosystem. They also help reduce the cost of trading. They also function as great on- and off-ramps for cryptocurrencies. Stablecoins can as well be used to generate higher yields than those of currency savings accounts.
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