The cryptocurrency market is characterized by high liquidity. When we add to this the correlation between the behavior of bitcoin and altcoins, stablecoins seem to be a “safe haven” in the case of price fluctuations on the market. In the early days of cryptocurrencies, the only option was to exchange them for fiat currencies. Therefore, protecting capital was more difficult and less convenient than today. In 2014, in response to this problem, the world’s first stablecoin was created, called bitUSD, and shortly afterwards, in the same year – Tether (USDT).
What are Stablecoins?
Stablecoins are utility tokens created on the blockchains of various cryptocurrency projects, such as Ethereum. They are characterized by minimal price volatility, and their value corresponds to “stable” reserve assets. They are therefore not speculative in nature, characteristic of the rest of the market. They are usually more centralized and controlled than other cryptocurrencies. The value of most stablecoins corresponds to the dollar exchange rate, there are also projects corresponding to the rates of other currencies, such as the euro (EURS, EURT).
The most popular way to maintain the value of such a coin is to create a collateral that is an exact or higher equivalent of the capitalization of the cryptocurrency. This collateral can be fiat money, securities, commodities, precious metals, or other cryptocurrencies.
In the event of strong market volatility, stablecoin values may begin to diverge from the dollar. This happened, for example, during the sharp declines in bitcoin prices at the turn of 2017 and 2018, and again during the corrections in March 2020 and May 2021. The task of the buying and selling algorithms at this point is to return to normal as quickly as possible.
There are also stablecoins without physical security, based only on smart contracts and algorithms. To maintain their stability, such procedures as automatic buying and selling of tokens and manipulation of supply are used. However, these are definitely less popular currencies, due to a much greater tendency to price fluctuations and concerns about possible legal regulations.
The capitalization of the entire stablecoin market according to CoinMarketCap is over USD 150 billion at the time of writing, of which almost half is USDT, the most popular stablecoin. Second in line is USDC, a token issued by the Coinbase exchange. The next is BUSD, created by Binance. These first three currencies together have almost 85% of the value of this market sector.
Stablecoin Security
The previously mentioned USDC and BUSD regularly undergo audits by external companies and it is clear that they have cash collateral for all generated tokens. It is worth warning at this point that the situation is completely unclear in the case of USDT. Initially, Tether Holdings Limited swore that the entire supply of USDT was supported by dollar collateral. In 2018, Tether published a report on its website, created by an external body, that was supposed to confirm this claim. However, it turned out that the company conducting the alleged audit did not have the authority to carry out this activity and the document was deemed invalid. At the same time, the world was informed that probably only 2.9% of the USDT supply is secured by cash. In 2021, another report appeared on Tether’s website. It speaks of full collateral for tokens, including about 9% cash collateral. However, it can be observed that the cryptocurrency community approaches the credibility of these declarations with reserve, and Tether is slowly losing its dominance on the market.
Tether Problems
Investment research firm Hindenburg Research announced a $1 million bounty in October of this year for help in establishing the truth about Tether’s security. The lack of real coverage could lead to a situation that has already occurred several times in the history of traditional banking, the so-called “bank run.” This is a situation in which many people simultaneously want to withdraw money and the institution simply does not have it. This would undoubtedly have a disastrous effect on the cryptocurrency market.
These are not the only problems Tether Holdings has. The company is run by JL van der Verle, who is also the CEO of Bitfinex, one of the world’s largest cryptocurrency exchanges. The two companies are accused of collaborating on multiple manipulations of Bitcoin’s price, including causing the largest cryptocurrency to surge at the end of last year’s bull run.
In 2019, Bitfinex was accused of using Tether reserves to cover an $850 million loss. As is often the case with large companies, cases end only with a fine. However, it is good to be aware that the so-called Tether FUD (fear, uncertainty, doubt) is not unfounded, and there are safer alternatives on the market to invest funds. It may turn out that the perceived value of USDT is not reflected in reality.
Are stablecoins worth using?
In summary, stablecoins are very useful tools in the cryptocurrency market. They are a good place to invest your funds during market fluctuations, as well as when you simply do not want to store your money in traditional banking. However, in order for our funds to be safe, the institutions to which we entrust them should be fully reliable and secured. Probably, as in the case of most investments, diversification will work well. Popular, fully secured and transparent stablecoins include: USDC, BUSD, PAX, TUSD or the Terra project, which is gaining great popularity this year, with the UST stablecoin.
