Despite a better environment for the crypto sector across the jurisdiction of different countries, the FUD around some top stablecoins is increasing rapidly and raising a very big question in the minds of newbie & experienced crypto investors regarding their stablecoin choice.
At present, the top three stablecoins are Tether (USDT), with a market cap of $128.87 billion; Circle (USDC), with a market cap of $37.89 billion; and Dai (DAI) Market cap of $5.37 billion.
These top stablecoins, including some other stablecoins backed by leading crypto companies, are efficient for transferring money and trading cryptocurrencies seamlessly in a decentralized environment. However, when the transaction amount is high, it becomes a significant concern for users regarding the trust level associated with that stablecoin.
Top Two Stablecoins: Tether ($USDT) & Circle ($USDC)
The top two stablecoins by market cap are USDT & USDC. The high market cap of these two stablecoins is proof of the trust level of these stablecoins among the majority of crypto investors.However, the majority of people believe that the higher the market cap value of any financial product, the higher the confidence level of investors, but in reality, this is not true in the practical world.
Currently, USDC stablecoin issuer Circle is regulated in mainly the US jurisdiction, while USDT issuer Tether is regulated in multiple jurisdictions. Both the stablecoins are centralized to ensure the prohibition of the misuse of a stablecoin in money laundering-like activities.
High market cap stablecoin risks: History
TerraUSD ($UST) stablecoin was introduced by Terraform Labs, a South Korea-based blockchain firm, but this stablecoin collapsed badly under high volatility in the crypto market in May 2022.At the time, the $18 billion market cap stablecoin, $UST, started facing downfall & with that, this stablecoin collapsed badly and never returned to a $1 pegged value. The United States Securities and Exchange Commission (SEC) filed multiple charges against Terraform Labs leadership.
The SEC has created an information page for investors harmed by the Terraform fraud. For more: https://t.co/o1a62mGYut
— U.S. Securities and Exchange Commission (@SECGov) July 30, 2024
So here, people need to understand that market cap is not the ID card of trust level. Instead, the actual business model of stablecoin is the key thing.
Top stablecoins business model
Tether & Circle both generate interest by investing in low-risk securities like US Treasury bills or commercial paper and also charge fees for issuing or redeeming tokens.
However, both the stablecoin firms are regulated, unlike TerraUSD stablecoin, but USDC is more regulated with higher transparency to attract big institutional players to use USDC stablecoin.
Here, we can see that the business model of these companies is better enough, and also, they are allowing people to redeem their stablecoins directly, which was not available for TerraUSD stablecoin.
Red flag stablecoins
However, stablecoins are designed to remain pegged with the value of corresponding fiat currency, but bad business models or market situations it.If any stablecoin faces a downfall in value by 5% to 10%, then it is an alarm to look behind the main issue, why the depegging occurred & what experts say.Don’t show greed in this situation to buy stablecoins at a discount price because it may lead to a full loss of investment.
Before selecting any stablecoin for a high amount of money collection/transaction, check the amount of reserved funds held by the stablecoin issuer company; otherwise, such things may end up in very big negative news, which may act as a catalyst to plummet the value of stablecoin sharply forever.
Experts suggest don’t go with those stablecoins, which offer a high amount of staking/interest reward per annum.
Note: Protocol-based stablecoins also lie in the category of red-flag stablecoins. In the past, many protocol-based stablecoins, which were backed by the value of volatile assets, collapsed badly. For example, Iron Finance ($IRON) collapsed in 2021, Basis Cash ($BAC) collapsed in 2021, Neutrino USD ($USDN) collapsed in 2022, SafeDollar ($SDO) collapsed in 2021, Nubits ($NBT) collapsed in between 2016 to 2018 in stepwise phases. TerraUSD was one of the biggest protocol-based stablecoins, which collapsed badly & Wipeout nearly $60 billion from the market; with that incident, many people committed suicide.
Avoid using Red Flag stablecoins
Red flag stablecoins are those that bear some big negative factor over their valuation or business activities. If we have any fear before going with any stablecoin, we should first analyse the business model to find out negative things about that stablecoin. For example, the downfall of TerraUSD stablecoin was already predicted by some experts because the value of TerraUSD stablecoin was backed by the value of Terra ($Luna) Cryptocurrency.
So avoid using those stablecoins that lack transparency about their business model, regulatory compliance, partnership with reputed institutions, unrealistic growth, unknown or anonymous team behind the stablecoin firm, weak technology or security, poor governance & centralisation, questionable reserve composition, and history of misconduct.
Ways to reduce the risk with Stablecoin use
However, not every person has the ability to investigate the negative or positive things easily about any stablecoin, but there are ways to reduce the degree of risks against using stablecoins.
If it is necessary to use stablecoins in high amounts, then people should choose top highly reputed stablecoins like $USDT, $USDC, and $DAI for financial activities in the crypto space.For example, if a person has $1 million to hold in stablecoin, then he should hold this amount of fund in three equal parts on three different stablecoins.However, this idea of using stablecoin is based on the fundamentals of portfolio diversification but is significantly worth it under worse situations.
Stablecoin regulation & revolution
Currently, the majority of the top stablecoin issuers are facing some unique challenges, and these challenges are creating opportunities for other players to enter the stablecoin business.
Over the past 3 years, the regulatory environment for stablecoin firms saw significant improvement, where many companies found crystal clear rules & laws to operate their stablecoin business easily.
In the last couple of years, two top Fintech companies, namely Ripple and PayPal, launched their stablecoin.
Ripple’s stablecoin ($RLUSD) and PayPal’s stablecoin ($PYUSD) are currently available on multiple crypto networks & multiple crypto platforms.
$RLUSD was launched in mid of Dec 2024 & current market cap of this stablecoin is $72 million. On the other hand, $PYUSD was launched in Aug 2023 & the current market of this stablecoin is $1 billion.
It is worth it to note that both the stablecoins are issued by high profile reputed Fintech companies, but their corresponding market cap is not very high, and this is a sign that they’re stepping with trusted footsteps instead of manipulating or fake data.
Read also: Syria plans Bitcoin adoption to boost economy amid potential changes in government leadership
