Stablecoins allow investors to avoid the risk of price fluctuations while maintaining their investments without having to worry about volatility. However, not all stablecoins are made equal.
Cryptocurrencies are recognized for their volatility, which means that professional traders have lots of chances in the market. If investors want to keep holding for a long period of time, they should anticipate to be taken on a wild ride.
Stablecoins, a type of cryptocurrency that provides price stability linked to the value of fiat currencies, are regarded as safe havens during market tumult but may also be seen as lost chances in the long run.
According to several experts, retail investors should adopt a “pay yourself first” mentality when dealing with cryptocurrencies, and that an allocation of up to 5% in crypto should be relatively “safe” while providing for “marginal return.”
Stablecoins are not the same: There is no “marginal return” to be had merely holding a currency that is linked to the value of the United States dollar, however yields on decentralized finance (DeFi) methods can reach double-digit yearly percentage rates (APRs). These processes, nevertheless, imply greater risk.
Different stablecoins have different risks –
Stablecoins aren’t all the same. The largest stablecoins on the market — USD Coin (USDC), Tether (USDT), and Binance USDS (BUSD) — are backed 1:1 by cash or assets with equivalent value held at a central firm. This implies that there’s a dollar in cash, cash equivalents, or bonds in custody for each token in circulation.
Other stablecoins, such as Dai (DAI) and TerraUSDC (UST), rely on distinct mechanisms. DAI is guaranteed to maintain its peg by being overcollateralized with cryptocurrencies. It contains economic policies that promote supply and demand in order to make it rise to $1.
On the other hand, UST is a non-collateralized algorithmic stablecoin. It doesn’t rely on an underlying asset because it employs algorithmic growth and reduction to maintain its peg. Terra, the blockchain that supports UST, has been accumulating assets for the stablecoin. So far, it has already acquired over 40,000 BTC worth around $1.6 billion and more than $200 million in AV (AVAX).
“I believe that USDC and other US-regulated stablecoins are as safe as keeping reserves in a bank account,” says Marissa Kim, general partner at Abra Capital Management — the asset management wing of crypto investment firm Abra. “These are required to demonstrate on a regular basis that they are fully collateralized, therefore I think they’re as secure as maintaining reserves in a bank account.”
To Kim, decentralized stablecoins like DAI and UST might “pose additional risks” because volatile markets may cause DAI to lose its USD peg. She also expressed concern about the protocol’s governance, stating that it is “by the MakerDAO community, and no one knows who owns or governs this protocol.”
“The role of USDC and USDT in the cryptocurrency space is synonymous to the role of the U.S. dollar in the traditional financial system,” said Adam O’Neill, chief marketing officer at cryptocurrency trading platform Bitrue, to Cointelegraph.
O’Neill advised investors to use stablecoins.“as a go-to hedge when trading and storing their assets.” He added: “The security outlook of stablecoin should not be compared, as both the centralized and decentralized versions are secure in themselves. However, it is not uncommon to find hackers exploit the frailty in protocols built to offer products bothering both classes of stablecoin tokens.”
To O’Neill, the question of how much speculators should invest in stablecoins is a personal one and is dependent on their investment objectives. According to Kent Barton, tokenomics lead at ShapeShift DAO, while every stablecoin has its own risk profile, there are some things investors should consider.
For one, centralized stablecoins like USDDC and USDT may be readily converted back into US dollars, but the entities that minted them “could potentially blacklist specific addresses, for example, in response to demands from legal bodies.” Barton went on to say that while there are long-standing worries about USDT’s backing, it has so far maintained its peg: “USDT has the advantage of being time-tested: It’s the stablecoin that’s been around the longest. It has deep liquidity across centralized exchanges and many DeFi platforms.”
The security of each stablecoin, according to Olexandr Lutskevych, founder and CEO of cryptocurrency exchange CEX.io, is defined by how security is defined. The vulnerabilities of more-vulnerable stablecoins should be addressed through code inspections, while most have been shown to meet the requirements in terms of transferability.
With respect to the dollar’s ability to keep its peg, Lutskevych said investors should be focused on how that peg is maintained.
Stablecoin DeFi promises: Are they too good to be true? –
Simply keeping stablecoins in place prevents cryptocurrency investors from dealing with the market’s volatility, but it also means they won’t profit unless they put their stablecoins to use.
There are several alternatives to stablecoins, such as lending them out on centralized exchanges or using blue-chip decentralized finance protocols that result in modest yields — typically below 5% — and are extremely safe. Moving to riskier protocols or employing complicated methods to enhance yield may lead to greater profits while also posing more danger. For example, it’s possible to obtain returns of more than 30 percent for Waves’ Neutrino USD (USDN) stablecoin, which recently broke its peg and plummeted below $0.80 before beginning to recover. when asked whether investors should lend their stablecoins or contribute them to DEX liquidity pools to earn yield, Kent Barton from ShapeShift DAO advised that DeFi protocols introduce smart contract dangers into the equation, which must be evaluated.
One-month USDN/USDT chart showing when the token broke its peg. Source: TradingView
“Protocols that have been operational for more than a few months and have an established track record of protecting billions of dollars in value are, in my opinion, quite secure,” Barton remarked. There’s “no assurance of future security or stability,” he adds. Protocols with greater rewards are, in general, riskier.
Lutskevych advised investors to first understand exactly what they’re investing in: “Just because it is DeFi, the investment principles do not change. And, one of the foundational investment principles is: Before proposing any strategy, you should thoroughly understand one’s risk preferences and individual circumstances.”
When it came to O’Neill, investors’ money, time horizon, objectives, and risk tolerance should all be considered while deciding whether or not to stay put or relocate stablecoins for profit. Investors should also be prepared to pounce on any opportunity “generally,” according to Lutskevych.
Stablecoins, owing in part to the DeFi sector, provide investors with a wide range of possibilities on a variety of blockchains. Investors may need some specific knowledge to use them outside of centralised exchanges, and they might lose their money by, for example, sending them to the incorrect kind of address.
Risk tolerance and experience –
Carlos Gonzalez Campo, research analyst at investment product issuer 21Shares, told Cointelegraph that stablecoins provide investors with “a global network of value transfer similar to how the internet gave rise to a global and open network for information.”
According to Campos, February’s Consumer Price Index (CPI) data in the United States revealed a 7.9 percent year-over-year increase, which he called “extremely alarming.”
According to the analyst, stablecoins are used by investors in a wide range of ways, depending on their risk tolerance and level of expertise. “The user experience is still lacking today” in DeFi platforms that allow users to earn passively through their assets, he noted. Campos added: “The clearest example is seed phrases, which are impractical and probably won’t achieve mass adoption. That is why leaders in the industry such as Vitalik Buterin have emphasized the need for wide adoption of social recovery wallets, which instead of relying on seed phrases, rely on guardians.”
Marissa Kim, a managing partner at Abra Capital Management LLC, seems to have agreed with Campos’ comments, stating that bugs and other attacks are conceivable in DeFi protocols, which frequently pay greater yields in the protocol’s native tokens. They are “often highly volatile and may not be very liquid.”
To Marissa, there are investors who are willing to accept more risk, while others will be “more concerned with equity preservation.”
Whatever technique investors use, it’s clear that stablecoins are an important component of the cryptocurrency world. More risk-averse investors may discover that they can only trust the most transparent centralized stablecoins with limited possibilities, whereas more daring ones may prefer greater yields and more risk.
Stablecoins’ influence in the cryptocurrency market is only expected to grow over time, so it’s critical that investors understand what they’re dealing with and the associated risks before putting their money into any stablecoin.
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