Cryptocurrencies aren’t a tiny investing universe. According to Morningstar, the decentralized finance market for the top 100 virtual coins has ballooned from USD 5.2 billion to USD1.7 trillion in capitalization over the past 7 years till January 31, 2022. Investors rank cryptocurrencies as a major investment tool behind stocks, bonds, and mutual funds.
Many crypto assets are available, like Bitcoin, Ether, and Stablecoins. Of these, Bitcoin is the most popular. Ether has more features encoded, except for the widely used currency. The executive codes called “a smart contract” are written inside the crypto to trigger sales or purchase purposes.
Stablecoins, on the other hand, are linked to real money. They are the products of decentralized blockchain technology used to confirm their authenticity and unalterable character. We’ll discuss them in greater detail below.
What are Stablecoins?
Stablecoins are part of the cryptocurrency universe. What distinguishes them from other crypto assets is that they have asset-backed protection. You may learn from the news that Bitcoin’s price has fallen by more than 40% over the past year – from the peak of USD 40,143 in November 2021 to USD 24,526 now. The highest apex for Bitcoins in 2021 is about USD 65,000. Not every investor welcomes this huge and frequent rollercoaster of an investment.
As a medium of monetary exchange and storing value, most cryptos may not be the best investment for many investors due to their fluctuating nature. This is where stablecoins come in handy. Stablecoins fill up the deficiency by linking the value of such cryptocurrencies to fiat currencies. The appeal is investors can locate the value of a stablecoin pegged to a currency, like the US dollar or the price of gold. The value linkage serves as a clear indicator to investors and helps stabilize their prices.
Types of Stablecoins
3 types of stablecoins with external asset protection are available in the stablecoin market:
1. Crypto-Collateralized Stablecoins
It is a cryptocurrency-backup digital asset. A Stablecoin’s value depends on its linkage to another or more currencies. One Stablelcoin may link its worth to half of or another cryptocurrency’s value. Typically, an allowance of up to 50% of a trading band in price is available for smooth market sales. In addition, regular audits and monitoring are in place to ensure pricing stability and transparency.
2. Fiat-Backed Stablecoins
Stablecoin is the most popular investment tool. It uses US dollars and commodities like gold and oil to determine the value of a unit of Stablecoin. But the US dollar is still the most used backup asset for fiat-collateralized stablecoin. Both USDC and USDT are the USD stablecoins using the US dollar reserves to back up their values. One USDC or USDT is equivalent to one US dollar. The cryptocurrency issuers have the same US dollar amount of reserve to match the currencies in circulation.
3. Non-Collateralized(Algorithmic) Stablecoins
An operator doesn’t use the reserve to back up its value but adopts a central-bank mechanism to control the pricing value and currency supply. Pegging its value to a currency or precious metals, the administrator monitors and regulates the supply of the crypto basing information from third parties.
If a Stablecoin’s value increases by more than one dollar, the coin developer will issue more coins. At the same time, a drop in value triggers supply shrinkage. A smart contract is program codes embedded in a digital currency for automatic implementation activated by pre-set conditions.
Why are there so many Stablecoins?
Stablecoins, a type of crypto family, are becoming popular due to several reasons:
One primary reason is people can use it to pay or invest like other hard currencies. Yet, the appeal is the anonymity and openness of the whole system. The operating environment is transparent except identities of transacting parties. It offers a real trade place but conceals players’ data and protects privacy.
2. Scant regulation
The cryptocurrency industry has less than a decade of short history. Since then, it has exploded into a multi-trillion-dollar sector. Authorities worldwide are still in the early stages of monitoring and adopting rules regulating the burgeoning market. With few restrictions in place, stablecoins, like other currencies, may appeal to more investors as their prices ascend. Also, the risks are increasing.
3. A Medium of Value
Unlike other cryptocurrencies, a stablecoin’s worth is linked to a dollar or other precious commodities or metals. It reduces the volatility of a typical digital cryptocurrency like bitcoin or ether. Stable value due to its peg to fiat currency or other relatively stable assets helps Stablecoins become a medium of exchange and storing value. It is gaining much more traction than other cryptos.
What is a USDC?
How does a USDC work?
A USDC (USD Coin) is a stablecoin and a member of the cryptocurrency family. The value of one USDC links to one US dollar. It is the product of a joint venture between Coinbase and Centre Consortium in 2018. The USDC has a global circulating supply of about 48.7 billion digital tokens with an equivalent amount of US dollar or US Dollar-denominated assets as a reserve. The 24-hour trading volume has reached USD 130.90 billion.
The assets for its reserve are in segregated accounts with the US financial institutions. Besides, the audit firm, Grant Thornton, will monitor and publish reports about the account status. The Centre Consortium administers USDC’s operating activities to comply with technical and financial protocols.
USDC is a crypto coin powered by the ERC-20 smart contract in the Ethereum system operating on blockchain technology. Yet, the currency is also available in other blockchain-based systems, e.g., Algorand, Solana, Tron, and Stella.
Transparency is one of the essential factors for being an investment tool. A transparent USDC creation process is critical. When you want to buy a new USDC, you deposit a dollar into an account with the financial institution, and, in return, the institution will issue a USDC through a smart contract code. Likewise, when you sell a USDC, the institution will collect and cancel a USDC and return a dollar to you. An open transaction procedure ensues that it accounts for the financial criterion. A cryptocurrency exchange is the second place you can buy a circulating USDC.
What is the USDC used for?
It is an asset-backup and value stable currency and has become a popular payment medium between merchants, financial institutions, and customers. Some notable financial institutions like VISA and Paypal accept USDC as payment currency.
More, retail investors use Stablecoin to hedge against volatility in the crypto market and earn a yield from it.
What are the Pros and Cons of the USDC?
- A low volatility asset: A USDC pegs itself to one dollar per coin. The price volatility for the USDC is more stable and predictable compared with other cryptocurrencies.
- An asset-backup digital currency: The USDC has US dollar and dollar-denominated assets equivalent in value for backing.
- Hedge against inflation and currency depreciation: Non-US investors can use USDC to hedge against price hikes caused by inflation and currency devaluation.
- Little appreciation potential: As a stable cryptocurrency, USDC has a small room for much appreciation like other cryptos, such as bitcoins or ether.
- Reserve composition: Little information about the composition of the reserve is disclosed. Doubts may arise due to its asset quality for backup purposes.
- Institution credibility: The USDC has been around for a few years. An institution may need time to test its capacity to run a competitive and ever-changing market as cryptos.
What is a USDT?
How does a USDT work?
Launched in 2014, USDT, also called Tether, is a digital token developed by a crypto exchange: BinFinex. Like USDC as a Stablecoin, Tether is pegged to one dollar per USDT. The cryptocurrency also uses blockchain-based technology to facilitate medium payment for trades. The current circulating supply is about 88.2 billion digital tokens, and the 24-hour trade volume is USD188 billion. USDT is the largest Stablecoin in supply and trade volume, followed by USDC.
As a medium of price stability and value storage for cryptocurrencies, Tether works on Ethereum network-based and developed by the blockchain technology. Besides Ethereum, the digital token is also available in other operating systems like Algorand, Bitcoin, Tron, and EOSIO.
Like USDC, Tether Limited, the stablecoin issuer of USDT, monitors and regulates the asset supply and management of asset reserves. Tether’s reserve disclosure reveals its asset composition: 75.85% in cash and cash equivalents and other short-term deposits and commercial paper; 12.5% in secured loans; 9.96% in corporate bonds, funds, and precious metals; other investments, including digital tokens.
What is the USDT used for?
A USDT, like other stablecoins, is a payment conduit for trades and consumption. The use of USDT eliminates transaction fees and speeds up the traffic process. Besides, unlike other financial institutions, the identities of transacting parties are anonymous and private. Apart from that, you may gain interest by investing in Tether.
What are the Pros and Cons of the USDT?
- A low volatility digital asset: USDT is a stablecoin offering a one-to-one match for the US dollar and leads to price stability and storage of value.
- A fiat currency reserve: The value of USDT is fully backed by the US dollar and dollar-denominated asset reserve. The backup system increases investors’ confidence.
- Hedge against inflation and currency depreciation: The USDT, as a valuable, serves a hedging tool for other currency depreciation and price inflation.
- Liquidity: Tether is the largest stablecoin in market cap and trading volume. High liquidity and transparency lead crypto to become a major popular alternative to hard currency among investors and consumers.
- Little appreciation opportunities: Like USDC, One Tether’s value cap is one US dollar. You do not see unpredictably exhilarating movements in USDT pricing but steady value indications in the market.
- Legal dispute: It is a reminder to crypto investors that the industry is not subject to strict legal regulations as others like financial institutions. The dispute originated from whether there were sufficient reserves for the Tethers circulating in the market. Though Tether finally settled with the authority, investors should remind of the many inherent risks of investing in new investment tools like cryptos.
What are the similarities between USDC and USDT?
- Backup reserve: Both digital coins have the same backup ratio of one token matched by one US dollar set aside in the equivalent value for its credibility.
- Stability and storage of value: The stablecoins are relatively stable in prices due to transparent pricing indications like a backup reserve. Therefore, they are popular among investors and users as a means of payment and value storage.
- Alternative to cash transactions: Due to their broad and global acceptance, people worldwide use them to transfer and pay for goods and services because of their rapid settlement time without the strict formalities required for mainstream payment channels. Besides, the identities of both parties to a transaction are anonymous.
- Transparency and security: USDC and USDT operate on the Ethereum platform developed by Blockchain technology. The technology is secure and also open-source. It is ideal for digital transactions and artwork creating activities like non-fungible tokens.
What are the differences between USDC and USDT?
|Coinbase and Centre Consortium
|About USD 48.7 billion
|About USD 88.20 billion
|Liquidity and Availability
|USD 48.70 billion
|USD 88.20 billion
|24h trading volume
|USD 130.90 billion
|USD 188 billion
|Ethereum, Algorand, Solana, Stellar, Tron
|Ethereum, Algorand, Bitcoins Cash Blockchains, EOS, OMG Networks, Solana
Should I use USDC or USDT?
The cryptocurrency industry, a decentralized finance industry, provides novel and disruptive technology to customers opting for alternatives to conventional ones. Yet, few regulations are in place to monitor the risks inherent to protect patrons. Maintaining self-regulatory discipline for companies is not the best way to long-term solutions.
Before more protection rules come out for customers and investors alike, investors should review companies’ credible operation history as a reference source. USDT has a long business history than USDC, but it had a legal dispute with the authority. You should study in detail before making a decision.
Though stablecoins offer customers privacy, a central administrator issuing cryptos and transacting sales may have more access to clients’ data and should have comprehensive rules to protect investors’ identities. USDC and USDT should disclose more about the policy. Besides, a transparent and credible administrator is critical to protecting investors’ and clients’ interests. USDC is better in this aspect.
Currency liquidity is critical to the wide acceptance and use of digital currency. The USDT ranks higher in market cap, 24h trading volume, and supply than the USDC. Higher indications mean people are willing to own and use the digital assets for investment and paying for goods and services. Besides, higher liquidity increases the intrinsic value and enhances appreciation potential in a currency.
A recent legal dispute between USDT and the Government regarding Tether’s reserve disclosure has cost Tether Limited and Bitfinex USD 18.50 million to settle the probe. The urge and concern for more transparency and industry regulations are increasing. Though USDC does not have the issue so far, investors should be vigilant toward both currencies. You may expect more scrutiny and examination are coming forward to protect stakeholders.
The US congress and senate may pass a bill called “The Digital Commodity Exchange Act” to regulate the digital asset industry with consensus. Stablecoins are not the exception. The bill will delegate the regulation job to the US Commodity Futures Trading Commission to oversee and protect all concerned parties within the industry. It is not bad news as it may help the whole industry move forward toward a healthy and prosperous path further.
- USDT has a long operating history than USDC.
- USDT has ranked higher in 24h trading volume, market cap, and circulation supply.
- USDT has settled with the Government regarding the probe of its reserve disclosure.
- USDT has more support platforms than USDC.
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