In recent years, stablecoins are progressing fast and penetrating the financial landscape. Stablecoins are distinguished from other crypto currencies by their stability and multiple advantages. By mid-2021, stablecoins represent more than 8% of the capitalization of all cryptocurrencies, which is far from negligible, especially as this number is constantly increasing. We come back here in detail on stablecoins, their advantages and disadvantages, their perspectives. We also offer you our Top 5 of the best stablecoins of the moment as well as our explanations for investing in this type of crypto asset.
WHAT IS A STABLECOIN?
Stablecoins are a category of cryptocurrency whose objective is to replicate the movement of other financial assets (currencies, precious metals, etc.). This is a "stable" cryptocurrency ("coin"). Based on the Blockchain, stablecoins make it possible to benefit from the advantages of crypto currency (digital, speed, decentralization), and less volatile traditional assets (dollar, gold, etc.). Stablecoins make it possible to reconcile traditional currencies and cryptocurrencies. In mid-2021, stablecoins made up over 8% of the overall crypto market. The distribution of stablecoins capitalization is very concentrated.
Thus, a stablecoin indexed at 100% to the dollar (1 to 1) will guarantee entirely stable purchasing power in dollars. The most widely used stablecoin to date, Tether, was launched in 2014 by Hong Kong-based company Tether Limited. Stablecoins are a bit like 18th century banknotes, and arouse great interest among central banks. An abstract form of money, stablecoins are a kind of technological adaptation of money.
The 3 Categories of Stablecoin
There are three main categories of Stablecoins :
- stablecoins based on currencies such as the dollar or the euro (Tether, USDC ...);
- commodity-based stablecoins (Tether Gold, PAX Gold, etc.);
- stablecoins based on other crypto currencies (Dai ...).
WHY BUY STABLECOINS?
Cryptocurrencies are among the most speculative assets. In extreme cases, variations in Bitcoin can quickly reach several tens of percent in a single day. The instability of major cryptocurrencies remains a weakness as the market is very sensitive to the overall state of the financial system. We will recall the close link that exists between liquidity, volatility, and crypto assets.
The advantage of stablecoins is to be based on the Blockchain and on a traditional asset to ensure very low volatility. The interest of stablecoins is therefore twofold:
- ensure liquidity and low volatility in the portfolio;
- have flexibility in use (speed of transaction, security, etc.).
Stablecoins are particularly useful depending on the overall market context. Indeed, stablecoins are very useful for optimizing the periods of corrections on other cryptocurrencies. Playing on exposure to stablecoins thus optimizes the performance of your portfolio. In addition, exposure to stablecoins allows you to benefit from the advantages of the Blockchain while being exposed to the currency markets (dollar, euro) and precious metals for example. It is an implicit way to diversify its crypto assets and to speculate on the movement of assets external to the crypto market (exchange rates, commodities, etc.).
BENEFITS OF STABLECOINS
Stablecoins have various advantages. First, the low volatility helps to compensate for movements in other cryptocurrencies. Then, the digital and decentralized character from the Blockchain allows stablecoins to benefit from great mobility and ease of exchange. For example, transferring stablecoins is faster and generally more transparent than the traditional SWIFT banking system.
On the other hand, stablecoins keep your earnings. The realization of capital gains can be secured by a conversion into stablecoins. In this sense, stablecoins play a crowding out role in the cryptocurrency market and can replace traditional cash in the wallet.
In addition, stable coins allow crypto investors to secure their capital gains tax-sheltered. Indeed, if you want to pocket your gains made in Bitcoin, Ethereum, Cardano or Litecoin for example, without being subject to the flat tax, you just need to convert them into stable coins. In fact, the tax on cryptocurrencies only applies when the tokens are converted into a legal tender currency and not when one cryptocurrency is converted into another.
DISADVANTAGES OF STABLECOINS
Obviously, an asset with low volatility limits the possible gains. The purpose of stablecoins is therefore not to make substantial gains, but rather to sterilize part of its capital in the form of crypto currencies. Moreover, stablecoins are not tied to particular projects as is the case with other innovative cryptocurrencies.
The second drawback remains the liquidity problem. Not all stablecoins are this liquid. As proof, the capitalization of the first three stablecoins (Tether, USD Coin, Binance USD) represents nearly 85% of the capitalization of all of the fifty or so existing stablecoins. In addition, some cryptocurrencies like Dai, indexed 100% to the dollar, is guaranteed by a mix of crypto currencies. Conversely, Tether, also indexed 100% to the dollar, is secured by the same amount of dollars in reserve.
THE FUTURE OF STABLECOINS: BETWEEN DEMOCRATIZATION AND REGULATION
Stablecoins are growing in popularity and their share in the cryptocurrency market is becoming more and more important. This new type of asset appears both as an alternative to traditional currencies and as a way to diversify your Bitcoin and other crypto portfolio. We will indeed note the extreme progress of Tether in recent months. Between mid-2020 and mid-2021, Tether's capitalization increased by more than 600%, from $ 9bn to $ 64bn.
This strong democratization of stablecoins should be put into perspective with the overall performance of the crypto asset market as well as the desire to secure the gains of recent months. On average, more than 8% of the value of cryptocurrencies held by users across the world are stablecoins. Thus, the birth of a stablecoin market ensures greater stability in the cryptocurrency market.
The success of stablecoins is expected to continue. On the one hand, their stability serves as an assurance for the entire crypto market during corrective phases (profit taking, speculation on foreign exchange and metals, etc.). On the other hand, stablecoins are a real monetary innovation with growing success (Visa payments, etc.).
Towards a regulation of stablecoins?
Most stablecoins are pegged to currencies, mainly the dollar. These new assets play much the same role as 18th century banknotes, guaranteeing the equivalent in reserve. As a result, stablecoin issuers are a bit like “digital banks” that issue cryptos with their equivalent in reserve. Thus, some central banks are showing their willingness to regulate stablecoins in the same way as the traditional banking system.
THE BEST 2021 STABLECOINS TO DISCOVER
Tether, star of stablecoins!
Tether is the largest stablecoin in the cryptocurrency market. Tether represents nearly 55% of the capitalization of all stablecoins, or more than $ 60bn in mid-2021. Tether (symbol USDT) is indexed 100% to the dollar: 1 USDT = 1 dollar. Founded in 2014, Tether is managed by Jan Ludovicus van der Velde of Tether Holdings Limited. The parent company is located in the British Virgin Islands, with a subsidiary Tether Limited based in Hong Kong. Tether is therefore linked to the Bitfinex exchange. Nonetheless, the company remains broadly transparent and investors have increased their confidence in the Tether system.
In 2019, Tether's lawyer Stuart Hoegner reported that Tether was only 74% covered by fiat currencies, the rest of the cash would have been available to Bitfinex. Overall, however, Tether remains highly rated and popular with investors. The fact that banking operations are carried out on reserves makes it difficult to have cover backed by 100% fiat currencies. Indeed, some companies issuing stablecoins can carry out various operations with the collateral liquidity (loans, transactions, etc.). This has the effect of reducing the fiat currency coverage of issued stablecoins.
Thether Gold
In addition, Tether also offers a cryptocurrency indexed to the price of physical gold. As of March 31, 2021, the company held nearly 85,000 ounces of gold, totaling $ 136 million in physical gold at the time, ensuring the same amount of tokens and ounces in reserve. Tether GOLD (XAUT) is less prevalent than USDT with a capitalization of $ 100 million in mid-2021. Tether GOLD accurately reproduces changes in the price of a physical ounce of gold.
USD Coin
The USD Coin is quite well known in the crypto world (8th largest cryptocurrency in the world and second stablecoin). Launched in September 2018 and run by Circle Company, USD Coin (USDC) is 100% pegged to the dollar. Based on the Ethereum Blockchain, USDC is very transparent about its reserves, quantities in circulation, etc. Recently, Visa integrated USDC into its payment services in the United States, making it a true crypto currency.
Dai
Dai is also a 100% dollar indexed stablecoin. Dai is run by a public governance organization: Maker DAO, which sets it apart from other stablecoins. The capitalization of the Dai is nearly $ 5 billion in mid-2021. The presence of public governance and collateral systems based on other cryptocurrencies makes Dai a special stablecoin.
PAX Gold
Based on the Ethereum Blockchain, PAX GOLD is a stablecoin indexed 100% to the price of an ounce of gold. This stablecoin is issued by the regulated company PAXOS, present in London, New York and Singapore. PAX Gold is a more prevalent stablecoin than Tether GOLD, with a capitalization of almost $115M. The gold equivalent is insured by PAXOS.
HOW TO INVEST IN STABLECOINS?
Stablecoins are generally accessible on most cryptocurrency exchanges: Binance, Coinbase, BitPanda, Coinhouse, Bykep, etc. Generally, stablecoins are intended to supplement a Bitcoin wallet and other cryptos already existing on these platforms. Investing in stablecoins may be relevant from the perspective of rising or falling certain exchange rates, profit taking, bullish expectations on certain commodities, etc.
The ideal share of stablecoins is therefore generally around 10% to 15% of one's Bitcoin and crypto portfolio. Indeed, it will be recalled that stablecoins are approaching the 10% share of the cryptocurrency market. The share of stablecoins in the portfolio should ideally increase during corrective periods in the cryptocurrency market.