Headline: What is stablecoin?

Date: 2/14/2022

Body:  Doing research on cryptocurrencies, I keep running into some new vocabulary (new to me, I’m olde.  Sorry.)   The one I have seen that intrigues me most is Stablecoin.  This certainly seems to be on the minds of a lot of regulators, and no wonder why; Stablecoin investments exceed $150 Billion.   That’s REAL money!!

What is a Stablecoin?

A stablecoin is a kind of coin where the value is pegged to the value of something else.  Before you get the wrong idea, volatility is somewhat mitigated, not eliminated.  They obtain their relatively low volatility because they are collateralized or matched to transactions using the other currency or its derivative.  Said another way, Stablecoins are a cross between fiat currency (governed by a Central Bank, and backed by a nation state) and cryptocurrency.

Are there different flavors of Stablecoins?

Yes, there are different types of Stablecoins.  Chiefly, there are 3:

Kinds of crypocurrency. DescriptionExamples of that currency.
Fiat-Collateralized StablecoinsUsually pegged to the USD, some are pegged to gold.  The reserves that make it safe are audited frequently.Tether & TrueUSD
Crypto-collateralized StablecoinsAs an example, for every$2,000 of cryptocurrency, they will issue $1,000 of Stablecoin.   This forms a margin of safety that mitigates volatility.MakerDAO is an example backed by Ethereum.
Non-Collateralized (Algorithmic) StablecoinsThis kind of crypto does not have collateral,but, does have some mechanism to alter the money supply and keep volatility lower than other crypto.Basecoin is an example of this, and they have a consensus mechanism to decide to increase or decrease the money supply.


Are Stablecoins regulated at all?

In this nation, there has been some call to regulate Stablecoins to ensure that there is enough collateral or that the mechanisms of self-governance are in good order.   Internationally, in October 2021, the International Organization of Securities Commissions made a statement that these coins should be regulated as financial market infrastructure (like payment systems).   These rules are at this point proposed rules only.

Why do people use Stablecoins at all?

People use Stablecoins because they represent a very nice hybrid of fiat currency and cryptocurrency.   Like fiat currency, the volatility is relatively low, but, like cryptocurrency, it can be easily accessed and moved overseas in an instant usually without onerous fees.  This can be very useful if transferring remittances back to a home country or doing something similar.  Additionally, since the volatility is dampened, Stablecoins can represent an easy-to-use on-ramp for beginner crypto investors.

Can you give me some examples of stablecoins and some perspective on how important they are?

These are the 10 largest trading stablecoins by market capitalization as tracked by CoinMarketCap, a cryptocurrency data and analytics provider.

CryptocurrencyMarket Capitalization
Tether$ 78 Billion
USD Coin$ 51.7 Billion
Binance USD$ 17.3 Billion
TerraUSD$ 11.3 Billion
Dai$ 10.2 Billion
TrueUSD$ 1.5 Billion
Pax Dollar$ 946.1 Million
Neutrino USD$ 447.7 Million
Fei USD$ 423.7 Million
Tribe$ 331.6 Million

Valuations are current as of 2/9/2022

Can I still make some money with Stablecoins?

Yes, you can.   There are 3 main ways:

  1.  Appreciation—Though they are “pegged” to a currency or some commodity price, there is often some level of appreciation that naturally happens.
  2. Lending—You can lend your Stablecoins to other people, and earn 5 to sometimes 12% in interest.  This far outstrips anything a Bank will give you.
  3. Staking—OK, this one requires a little explanation.  If you go to a Bank and open a Money Market account, any cash you put into that account, the Bank will turn around and lend out to entities with projects they want to fund.  In return, the Bank takes a relatively large rate of interest.   Because you originally loaned the funds to the Bank, they pay you a rate of interest.   Staking is the same within the cryptocurrency realm.   The concept is still to increase the velocity of money.   Several industry authorities have made comments to this effect.   “Due to being an important reserve of capital and high liquidity, exchanges and lending groups in the community often will pay significant interest rates to hold or lend stablecoins,”  according to Namil Dalal, head of crypto at Coinbase.

The Verdict

If somebody wants to become active in the cryptocurrency markets, Stablecoins seem to be an excellent way to start.    Certainly an authority figure,  Janet Yellen said  that stablecoins were well designed and had the “potential to support beneficial payments options.” But she also cautioned that the absence of regulation was a problem.    This is the double-bladed sword that is represented by Stablecoins.  It would seem to me that if one invested a small amount of their disposable income into the top 3 Stablecoins (by far, the largest portion of these Stablecoins by Market Cap) one might do well.  More importantly, that investor would be able to inexpensively get more used to the mechanics of trading cryptocurrencies.






Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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