Stablecoins are a type of cryptocurrency whose value is typically tied to a stable asset (such as fiat currency, gold, or other commodities). Compared to other cryptocurrencies, stablecoins have a relatively stable price, hence the name 'stablecoin'. This cryptocurrency aims to provide a way to transact and store value that is more stable than other cryptocurrencies. The issuing organizations of stablecoins usually keep the stable assets they support in bank accounts for redemption at any time. When users purchase stablecoins, the issuing organizations hold the users' funds in bank accounts to ensure that the value of the stablecoins matches the stable assets they support. Stablecoins play an important role in the cryptocurrency market; they can be used as intermediary currencies in transactions or as value preservation tools.
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Classification of Stablecoins
Currently, there are various stablecoins on the market, which can be roughly divided into two categories based on their stabilization mechanisms:
Asset-backed Stablecoins
The supporting assets can be fiat currency (e.g., US dollars), commodities (e.g., gold), or other financial assets (e.g., bonds). Taking some stablecoins that claim to be supported by the US dollar as an example, to ensure that the value of one stablecoin equals one US dollar, the issuing organization claims to hold one US dollar or equivalent assets for every stablecoin issued. If one hundred million stablecoins are issued, then the issuing organization theoretically needs to have assets equivalent to one hundred million US dollars in reserves.
Algorithmic Stablecoins
Algorithmic stablecoins generally adjust the supply of stablecoins through algorithms to maintain price stability. When the price of the stablecoin falls below the target level, a certain proportion of stablecoins will be destroyed to reduce supply and allow the price to rebound until it returns to the target price. Conversely, when the stablecoin price is above the target level, the relevant mechanisms will increase the supply of stablecoins, causing the price to fall.
Main Risks of Stablecoins
Whether a stablecoin is stable mainly depends on its stabilization mechanism, so the effectiveness and reliability of that mechanism are crucial. If the stablecoin is asset-backed, it is necessary to consider whether there are sufficient assets behind it, whether these assets are properly safeguarded, whether they may be misappropriated, and whether the financial information disclosed by the issuing organization is accurate. Currently, the largest stablecoin by market capitalization, 'Tether' (USDT), has faced multiple allegations in the past regarding insufficient backing assets, lack of transparency in financial information, and absence of professional third-party audits of the backing assets.
Regarding algorithmic stablecoins, although supply is generally adjusted through algorithms, there also needs to be sufficient market demand for the stablecoin to achieve price stability. If there is a large sell-off of stablecoins in the market, the stabilization mechanism may not function effectively and could become a target for attacks. Attackers may use various methods to decouple the stablecoin for profit. The algorithmic stablecoin 'Terra UST', which was once the third-largest stablecoin, recently experienced decoupling and collapse, with its price plummeting nearly 90% in just a few days.
Like other virtual assets, stablecoins are currently still unregulated, without operational regulations and disclosure requirements, so some stablecoins' stabilization mechanisms are not transparent. If the price of a stablecoin collapses, or if the issuing organization mismanages it, commits fraud, or goes bankrupt, investors/holders of the stablecoin may find it difficult to recover their losses.
Avoid focusing solely on returns while ignoring risks.
Some virtual asset platforms or applications attract investors to lend or stake stablecoins with high returns, known as 'earning interest'. For example, deposits in 'Terra UST' could yield annual returns as high as 20%. However, there are no investments with high returns and low risks; the higher the potential return, the higher the risk. In addition to the risks mentioned regarding stablecoins, these virtual asset platforms or applications may also be unregulated, and if they collapse or encounter other issues, all assets stored within could be lost. Investors should also be aware that if these platforms have no connection to Hong Kong, Hong Kong's regulatory and enforcement agencies may not have jurisdiction over them. In case of disputes, investors may find it difficult to claim and might not be able to obtain compensation through legal means.
The virtual asset market is evolving rapidly, with new products emerging from time to time, which may involve complex operations and hidden risks. Virtual assets are high-risk products, and not everyone is suitable for participation. Investors must do their homework, thoroughly understand the characteristics and risks of the products, and consider their own investment goals and risk tolerance. They should avoid focusing solely on returns while ignoring risks.