First, What Is A Stablecoin?
A stablecoin is a cryptocurrency whose value is pegged to a real and stable asset such as a fiat currency (most common), precious metals such as gold or a group of crypto assets. The advent of stablecoins in the crypto market has been a game changer. Crypto prices are volatile at the best of times and stablecoins play a crucial role in combating that volatility by offering a convenient, stable place to park funds, enabling investors to keep cash-like assets within the ecosystem and providing an alternative to transferring funds to/from traditional bank accounts when trading crypto.
Given that crypto trades 24/7, 365 days a year, stablecoins have given traders peace of mind by allowing them to cash out of positions while they sleep rather than sweating on the overnight price swings of their portfolio. Holding a cash equivalent in a tokenised form also enables investors to move funds immediately within the crypto ecosystem and take advantage of buying opportunities much faster than waiting days for a bank transfer to arrive.
There is also the added benefit of being able to use stablecoins in the DeFi (Decentralised Finance) sector, providing access to lending and borrowing services with investor returns being far greater than anything that traditional banks can offer.
Stablecoins have now become entwined in every aspect of the crypto ecosystem and there is little doubt that they have contributed greatly to the development of the space as a whole. However, there are some risks investors should be aware of as some stablecoins offer very little in the way of transparency surrounding the assets that they hold in support of their token value. Let’s take a look at some of the most popular stablecoins which are pegged 1:1 with the US Dollar and live on smart contract enabled blockchains such as Ethereum, BSC etc. An up-to-date list of stablecoins by market cap can be found here.
The 5 Best Stablecoins
Tether (USDT)
The big daddy of them all is Tether (USDT) issued by Tether Holdings Limited, which is in turn owned by Bitfinex. At the time of writing they are the largest player in the stablecoin sector with a market cap of $78.7 billion and are used by most exchanges and is very popular in trading pairs and commonly used in DeFi.
Tether has come under considerable criticism in recent years in respect of the transparency of its holdings with some fearing that it poses a systemic risk to the ecosystem if it is not as fully backed as it claims it is. Regulators have also taken a keen interest. In 2019 the NYAG (New York Attorney General) investigated Tether and determined that the operators of the Bitfinex trading platform, who also control Tether, had engaged in a cover-up to hide the apparent loss of $850 million dollars of co-mingled client and corporate funds. The case was later settled by Tether and under the terms of the settlement they are now required to publish quarterly CRRs (Consolidated Reserves Reports) which disclose their holdings. The most recent report can be found here. Tether’s largest holdings include a mixture of Commercial Paper, Cash/Bank Deposits and Treasury Bills. Cash deposits only represent around 10% of its holdings while their other assets are considered low risk cash equivalents. It’s also worthwhile noting that Tether uses offshore banking…
