What are Stablecoins and are they worth using?

The cryptocurrency market is characterized by high liquidity. When we add to this the correlation between the behavior of bitcoin and altcoins

Cryptocurrency markets are highly liquid. When we factor in the correlation between bitcoin and altcoin behavior, stablecoins appear to be a “safe haven” during market price fluctuations. In the early days of cryptocurrencies, the only option was to exchange them for fiat currencies. As a result, preserving capital was more difficult and less convenient than it is today. The world’s first stablecoin, bitUSD, was created in 2014 in response to this problem, followed shortly after by Tether (USDT) in the same year.

What Are Stablecoins?

Stablecoins are utility tokens that are created on the blockchains of various cryptocurrency projects, such as Ethereum. They are characterized by minimal price volatility and are pegged to “stable” reserve assets, making them non-speculative in nature, which is characteristic of the rest of the market. They tend to be more centralized and controlled than other cryptocurrencies. Most stablecoins are pegged to the dollar exchange rate, but there are also projects that are pegged to other currencies, such as the euro (EURS, EURT).

The most common method of maintaining the value of such a coin is to create a collateral that is an exact or higher equivalent of the cryptocurrency capitalization. This collateral can take the form of fiat money, securities, commodities, precious metals, or other cryptocurrencies.

During periods of strong market volatility, stablecoin values may begin to diverge from the dollar. This occurred, 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 role 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, which are based solely on smart contracts and algorithms. Automatic token buying and selling and supply manipulation are used to maintain their stability. These currencies are, however, less popular due to a greater tendency to price fluctuations and concerns about possible legal regulations.

The entire stablecoin market capitalization is over USD 150 billion at the time of writing according to CoinMarketCap, 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. Together, these first three currencies account for almost 85% of the value of this market sector.

Stablecoin Security

The aforementioned USDC and BUSD are regularly audited by external companies and it is clear that they have cash collateral for all generated tokens. It is worth noting 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.

2019年，Bitfinex被指控使用Tether儲備來彌補8.5億美元的損失。正如大公司經常發生的情況一樣，案件最終只會以罰款告終。然而，值得注意的是，所謂的 Tether FUD（恐懼、不確定性、懷疑）並非毫無根據，市場上還有更安全的資金投資替代方案。事實可能是，USDT 的感知價值並沒有反映在現實中。

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