What are stablecoins? If you are new to cryptocurrency, you’ve got a lot of jargon and new concepts to learn. Among them is the notion of a “stablecoin”, which is a form of cryptocurrency. But it is rather unlike Ethereum and Bitcoin.
I’ve written before about the nature of cryptocurrency. It can be volatile and should be viewed as a high-risk speculative type investment. It should not be treated like a long-term, buy-and-hold stock. One good reason for that? It can be easily influenced by a single Twitter post by a famous person. Cryptocurrency does not feature the qualities of a stable investment with a long-haul payoff like Treasuries, savings bonds, 401Ks, etc.
Bitcoin Versus Stablecoins
That headline is a bit misleading, because it may appear that we are comparing apples to apples. Bitcoin is a specific type of cryptocurrency, but stablecoins are a class of digital currency. But the differences between currencies like Bitcoin and stablecoins are significant.
One type of stablecoin is called USD Coin and is meant to be traded on a one-to-one exchange basis with the United States Dollar. One USD Coin = One Dollar. All the time, every time. How does that compare with Bitcoin and the power of a famous person like Elon Musk’s power to dramatically affect the value of Bitcoin with a simple Twitter exchange about how overvalued Musk thinks it is at that moment?
If you see the inherent weakness in investing in Bitcoin as anything more than a speculative risk-taking venture (as opposed to a serious long-term financial investment strategy involving more predictable and less risky ventures), the value of a stablecoin like USD Coin becomes a bit clearer once you understand WHY USD Coin is “stable” and Bitcoin and Ethereum are not.
Why USD Coin Is “Stable”
The value of Bitcoin depends on marketplace enthusiasm. It depends on faith in the investment. But what it does NOT depend on is some form of inherent value. Bitcoin has nothing securing it in the physical world–not gold, not Deutschmarks or Dollars, not oil. It is in essence a faith-based investment. The faith, in this case, is in the continued enthusiasm of the marketplaces for the currency.
USD Coin (also known as USDC), by comparison? Secured on a one-to-one basis by actual U.S. dollars. According to Coinbase.com, “Centre, the consortium that mints USDC, collectively holds US$1.00 for every single USDC. These funds are held in a special bank account that is constantly monitored and audited.”
That means that, if the USDC system works as advertised, you will always be able to redeem your USD Coin as long as you have your crypto keys and the consortium that creates the currency is still in business.
Be An Informed Investor
It’s not that I want to actively discourage people from investing in crypto. But smart investors fully understand the risks of what they are doing and make choices informed by that knowledge. Investors who don’t have the full story wind up losing money because of lessons they had to learn the hard way. When choosing between stablecoins and a more volatile cryptocurrency, it pays to know why one is riskier than the other and what to do to protect your investments with those risks in mind.
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