I look at cryptocurrency stablecoins and how they are used, and compare them to the original stablecoin, the U.S. dollar.
I don’t know if you know this, but I’ve started syndicating all my content over on Medium. You can subscribe and get every post I write there.
If there’s one thing I enjoy the most about writing this blog, it’s interacting with the people who write comments. I love responding to people who write in. Assuming people aren’t obviously shilling for some product or aren’t a bot, I’ll generally engage with them on any subject.
And my post on why you can’t invest in crypto over on Medium has gotten a fair amount of traction recently.
And one of the commenters, mentioning their own strategy, said that they store their money in a stablecoin (the person mentioned USDT).
And it occurred to me that this line of thinking may be taking off, and therefore I should address it.
With so many places to store your money, you may have thought about putting your money in a stablecoin, especially if you’re more crypto-minded. This may seem more preferable to more traditional places like a money market account or a Roth IRA.
But is it safe?
Table of Contents
What’s a stablecoin?
First off, let’s define terms.
A stablecoin is a cryptocurrency that seeks to peg its value to another fiat-based currency, almost always the U.S. dollar.
The idea is that a stablecoin is immune to the wild swings of the broader crypto market, while still keeping your money in the same system. And staying in the system means that trading one cryptocurrency for another (or using it to buy things) is much easier.
Bitcoin, the most famous cryptocurrency, has swung wildly over the past year, from a high of around $60,000 to a low of around $20,000. To have one’s funds worth one third of what they were a year ago is a bit too much for many people to stomach, and so stablecoins are seen as an alternative.
But how do stablecoins maintain their value? In general, they need to be backed by some other source of funds, be it (optimally) actual U.S. dollars, or some equivalent.
When the price goes up, the firm sells some to bring the price down, and then vice versa. Thus is the peg sustained.
But are they safe?
I’m going to give a few examples of stablecoins, from the top performing ones (by market cap), to the one you’re most likely to have heard about in the news this year. Let’s take a look.
USDC is a stablecoin put out by the fintech company Circle. Like all of them, they aim to peg the value of their coin to the U.S. dollar.
And as you can see by this chart, they’ve done a pretty good job of doing so. With the exception of a few wobbles here and there, if you bought 1 USDC a few years ago, you’d have the equivalent of 1 US dollar today.
Circle claims that USDC is fully backed by cash, but this report has been unaudited as of yet, so it’s impossible to verify.
Current price: $1.00
USDT is a stablecoin put out by Tether, another fintech firm. It too is holding steady, at $1.00, and has done so for quite a long time.
Tether’s finances are a little bit more suspect. They don’t claim to be completely backed by cash, and in fact they seemed to be backed by loans and other crypto assets. They have never been fully audited, and are on record as having lied about their financial standings.
Nevertheless, if you bought 1 USDT a few years ago, you’d have the same amount of USD-equivalent dollars today.
Terra USD (UST)
Terra USD aimed to do their stablecoin thing a different way. Instead of being backed by loans or cash (collateral), it was what was known as an “algorithmic stablecoin“, meaning that its value was managed by an algorithm.
In order to keep this going, UST was linked to another cryptocurrency, Luna, which wasn’t a stablecoin, but involved incentives to keep the value of TerraUSD linked to 1 USD.
The specific details aren’t important, and no matter how many times I’ve read about it, it still hurts my head.
But the short version is: it worked fine until it didn’t.
In May of 2022, because of a few big moves in the market and the resulting changing sentiment, what happened was basically a bank run. Everyone went to cash out, and the price of Luna couldn’t keep up. The value of UST plummeted to effectively zero.
Today, if you had bought 1 UST a few years ago, today you’d have the equivalent of $0.05, a loss of 95%.
I urge you not to do much research on the posts of people crying out for help having invested lots of money in UST/Luna, only to be wiped out. It’s really not pretty.
Current price: $0.05
The U.S. dollar is the official currency of the United States of America. It is the most used currency in transactions across the world and is considered to be the safest store of value.
One could argue that the U.S. dollar is not backed by anything, at least since leaving the gold standard in 1971. You could also argue that it is backed by the United States military. You could argue that it’s based on faith.
But the U.S. dollar has been around for an awful long time, almost 250 years. In that time, anyone who has held a dollar has, as far as I can tell, always been able to keep that value.
Stablecoins, on the other hand, have been around for no more than a decade or so.
True, the purchasing power of the dollar has eroded over time, via inflation. However, a stablecoin is also prone to this same inflation, as they are pegged to the dollar. So a stablecoin adds a considerable, non-zero risk to the inherent risk to holding U.S. dollars.
Current price: $1.00
The value of a stablecoin
I’ve long said that if you’re concerned that the economy is going to collapse, you’re going to have bigger things to worry about than where you store your money.
But stablecoins are the worst of all worlds. With a peg to the U.S. dollar, it contains all of the same market fluctuations of the U.S. dollar and its purchasing power, while at the same time adding a tremendous amount of risk due to the companies who may or may not have the backing to support its ongoing peg.
Yes, stablecoins can earn you extra stablecoins if you put it in the right platform. But there’s nowhere you can put the money that you can earn an outsized return for an extended period of time. (One of the actors in the collapse of Terra/Luna was offering a return of 20%, which is clearly unsustainable, and proved to be so.)
Ultimately, if you want safety for your money, what would you choose, a money system that’s lasted for over two centuries, or a money system that’s been around for a few years, and is backed by questionable means as a part of that other system?
What you should do
Look, I know you’re probably of the belief that the U.S. is in a dark place and it’s possible that the economy could collapse. I personally worry that certain political actors, believing the electorate illegitimate, will stage a coup to get and remain in power.
But when it comes to money, ultimately, the U.S. dollar is the best thing we have.
And why not take those U.S. dollars and invest them with companies producing things of value? You can even invest in a whole slew of them at once, without ever having to know anything much about investing.
It’s called an index fund. Try it and see.