Stablecoins are the talk of the town after the recent bear market sent shockwaves throughout the global crypto community as TerraUSD (UST) one of the largest Stablecoins dropped below its $1 peg. This led to the catastrophic decline for Terra (LUNA) , which wiped away more than 98 percent of its market cap.
This past week we saw panic selling of crypto assets including stablecoins, which jolted the entire crypto ecosystem. The market sentiment remained bearish and we felt the need to clear the air around stablecoins.
Unfortunately this unprecedented development has shifted the market’s view of Stablecoins which were once perceived as a low-risk mechanism for investors to remain in the crypto ecosystem in the face of price volatility.
Stablecoins, are basically crypto assets that are pegged to a real-world asset—typically a fiat currency like US dollar —offering resilience to the price volatility that other coins experience.
After the fall of UST the market is skeptical towards other prominent Stablecoins like USD Coin (USDC) and Tether (USDT), both of which are pegged to the US dollar.
In terms of popularity both of these Stablecoins have risen to prominence as the market’s top stablecoins, appearing on almost every major cryptocurrency exchange, wallet, and application.
As we are closely monitoring the entire market situation we decided that its best to give some clarity to the market and talk about the two most popular stablecoins USDC and USDT and their potential risks.
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Okay now lets jump back to the article. In today’s article we will dive deep into the world of stablecoins and understand their underlying infrastructure and also discuss the associated risks that comes with holding your crypto in Stablecoins. We will also discuss USDC and USDT and discuss our take on whether or not you should hold them in your portfolio.
Understanding Stablecoins
To understand stablecoins we would need to go back to the early days of the crypto market where cryptocurrencies could only be traded for other cryptocurrencies or with Fiat currencies. Crypto holders were confronted with a problem that they couldn’t shift into a fiat-backed asset without abandoning the crypto realm. This is where Stablecoins stepped in. Offering price stability to investors during volatile market trends.
The concept was an instant hit, many crypto traders started to utilize Stablecoins to stay in the system.
But the question remains how does Stablecoins maintain their value?
Mined on dedicated blockchains, stablecoins are a form of digital currency that maintains its value over time. In most cases, you can tell them apart by looking at the underlying collateral structure, which might be any one of the following four types: fiat-backed, cryptocurrency-backed, commodity–backed, or backed by algorithms.
Stablecoins make achieving stability their top priority, regardless of the underlying collateral arrangements that they make use of, however recent developments have shown that they may not always remain true.
A Note of Caution: There can be instances where a Stablecoin may loose their $1 peg or dollar parity and drop during bear trends or as a result of market manipulation which happened recently in the case of TerraUSD (UST). Algorithmic stablecoins are most at risk because their collateralization algorithms can get affected in case of market manipulation or panic selling.
Now that we have understood what Stablecoins are lets learn about USDC and USDT:
What is USDC?
Coinbase, a well-known cryptocurrency exchange, and Circle Internet Financial introduced USDC in 2018.
Initially, USDC was solely accessible on Coinbase, but it is now available on a variety of cryptocurrency exchanges.
USDC is a coin based on the ERC-20 standard. It is based on the Ethereum blockchain, but it is also compatible with a number of other blockchains, including Algorand, Solana, Stellar, and Tron.
Each USDC is backed by a single USD. Each USDC in circulation represents one USD in an audited bank account. Constant audits verify that the market’s supply of USDC coins is equivalent to the supply of US dollars in reserve bank accounts. That is why the coin’s value remains constant regardless of what happens.
The method of creating a USDC is as follows:
- A predetermined sum of US dollars is sent to a designated bank account.
- A smart contract generates an equivalent quantity of USDC.
- Users receive their USDC coins back.
Where Is USDC Appropriate for Use?
USDC is a stablecoin that is backed by the US dollar. As a cryptocurrency, it has a steady value (for now). That is why it has been accepted as a payment mechanism by a large number of institutions.
USDC is an ERC-20 token that may be utilised by any Ethereum-based decentralised application (DApp). This helps to explain USDC’s appeal among the DeFi community.
USDC offers several advantages, but it also has certain disadvantages. One of the primary problems is that its blockchain is centralised. Circle Internet Financial owns the stablecoin, which runs counter to cryptocurrency’s primary organising principle – decentralisation.
If we look at the last 1-Week chart of USDC against USD on CoinMarketCap we can see that it remained fluctuating above 1$ peg most of the times and have experience only minor lows.
Despite offering price stability the market cap has been fluctuating significantly and the stablecoin still remains a little risky. Think before keeping your entire portfolio in USDC to hedge against the bear market, its better to diversify your risk and follow trades of our expert traders at MyCryptoParadise.
It’s important to mention that USDC’s all time low was $0.891848 on May 19, 2021.
What is USDT?
USDT, or Tether, is the world’s first stablecoin. It was founded in 2014 and has maintained a commanding lead in the stablecoin industry ever since. Bitfinex initiated the venture in 2014.
Tether has been attacked in recent years for not being open enough. The primary worry was whether Tether was actually backed by USD.
However, fears and questions were allayed upon the publication of Tether’s attestation report. The corporation included a detailed breakdown of their reserves in the report.
Tether does provide reports on its website from different auditors however no recent audit has been conducted to validate their claims. Thanks to transparency of blockchain technology, the stablecoin circulation may be tracked using the Omni Layer protocol on the Bitcoin blockchain.
A look at USDT’s recent price fluctuations after TerraUST collapse:
The past week has remained difficult for USDT where the stabelcoin lost its $1 peg and came close to 95 cents. After the UST fiasco there is FUD in the market and investors are removing capital from USDT.
If we look at the last 1-Week chart of USDT against USD on CoinMarketCap we can see that it has remained mostly below its1$ peg which is a risky situation for investors.
It’s also important to mention that USDT’s all time low was $0.572521 on March of 2015.
Final Thoughts: Is USDC better than USDT?
TerraUSD’s (UST) downfall has changed market sentiment negatively against Stablecoins. Once considered as a safety hedge against bear cycles the entire wipe-off of UST has made the crypto market more cautious towards Stablecoins which isn’t entirely a bad thing. There has been instances in the past where the cryptocommunity has raised valid concerns on the price stability of stablecoins. This recent event is a good reminder that we need to proceed with caution and always follow the advice of expert traders who have seen the market dynamics during the past several years.
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If you were to ask our opinion on USCD and USDT, our short answer is that it depends on your individual needs, preferences, and profile. If you want to enter into a market position and need quick access to capital then buying them makes sense.
If we talk about USDC and USDT individually then, USDC is the most often utilised currency by institutions in the United States (or where Coinbase is offered in other countries). If your customers are companies, you will most likely wish to send invoices to them in USDC. It makes sense to utilise USDC if you’re a Gilded user using the Coinbase connection.
USDT, on the other hand, is the most often utilised currency among traders and investors.
