Stablecoins at Vivid
Some investors have mixed feelings about the world of cryptocurrencies, and often switch between anxiety and curiosity. They're curious about these new digital currencies but anxious about their constant volatility. But it doesn’t always have to be like that. If you want to invest in cryptocurrency, you don't necessarily have to be at the mercy of extreme market trends. There is a category of cryptocurrencies called stablecoin that is (as its name suggests) stable. Let's dive into it.
How do they work?
Stablecoins are cryptocurrencies whose value is pegged or tied to the value of another currency, commodity or financial instrument. The aim is to stabilise the price, and investors who buy or decide to invest in them use them as a stable alternative to more classic cryptocurrencies. Stablecoins act as a bridge between the fiat world and the crypto world. They eliminate the volatility of cryptocurrencies and are better suited to regular usage, from day-to-day trading to making transfers between exchanges.
The value of these cryptocurrencies remains stable because they're pegged to something. It's not enough to say that a coin is worth one dollar to actually sell it for one dollar. How the value remains stable depends on the type of currency. Generally, we can divide them into two broad categories: collateralised and algorithmic.
Collateralised cryptocurrencies are pegged to an asset. It can be a fiat currency, a cryptocurrency or a physical commodity such as precious metals or oil. These currencies are always redeemed for the value of their collateral: if you want to redeem a coin with US dollar collateral, you will receive its exact value in US dollars in return.
The mechanism of algorithmic cryptocurrencies, on the other hand, is slightly different. They are stabilised by algorithms and smart contracts that aim to regulate their quantity. For example, when the price of an algorithmic cryptocurrency pegged to the US dollar starts to fall, the algorithm will reduce the number of currencies in circulation to bring everything back up to par. The same mechanism works in reverse. If the price rises, the algorithm will produce new ones so that the value always remains stable 1:1.
At Vivid, we've added several stablecoins to our catalogue. We want to make cryptocurrencies accessible to everyone, even to those who don't feel like jumping into constant chart monitoring to keep track of their assets. The value of a stablecoin remains stable, so if you invest 50 euros in stablecoin today, those 50 euros will very likely remain 50 euros. Here’s an overview of the ones we offer.
Coins we offer
Binance USD
It's a fiat-backed stablecoin that maintains a US dollar peg, backed by the New York State Department of Financial Services. It's the result of a collaboration between Paxos and Binance. For every unit of BUSD, one US dollar is held in reserve. In other words, an amount of US dollars equal to the total supply of BUSD is held in custody by Paxos. The network is supported by financial resources held in US Dollars deposited in specific accounts at insured US financial institutions. It also provides monthly audited reports of its reserves. BUSD is currently issued on several blockchains: Ethereum, BNB Smart Chain, BNB Beacon Chain, Avalanche and Polygon – and more integrations are expected to come soon. You can purchase and redeem it at a rate of 1 BUSD to 1 USD.
USD Coin
It's a stablecoin pegged to the United States Dollar on a 1:1 basis. It's managed by a consortium called Centre, launched by Circle and includes members from the cryptocurrency exchange Coinbase and Bitcoin mining company Bitmain. Every unit is backed up by $1 that is held in reserve, in a mix of cash and short-term US Treasury bonds. Its reserves are regularly attested by the accounting firm Grant Thornton and is treated by regulators as a stored value instrument.
The mantra of this coin is "digital money for the digital age", and it's designed for a world where cashless transactions are becoming more common. USDC operates on the Ethereum blockchain. The consortium's goal is to build an ecosystem where USDC is accepted by as many wallets, exchanges, service providers and dApps as possible.
TrueUSD
TrueUSD is a stablecoin running on Ethereum that tries to maintain a value of $1. The supply of TUSD is collateralised by US dollars held in escrow by banks. It's one of several cryptocurrency stablecoins administered by TrustToken, a platform that tokenises real-world assets. It was initially launched to a limited investor base in January 2018, but since then has grown to incorporate almost $400 million of backed tokens as of October 2020.
Like other stablecoins, TrueUSD's goal is to facilitate increased liquidity and provide cryptocurrency traders and general users with a non-volatile asset relative to free-floating tokens and cryptocurrencies.
Why would you want to invest in a stablecoin?
Photo by Monstera
Most of the people who invest in stablecoins want to minimise volatility. The value of cryptocurrencies fluctuates a lot. Owning an asset pegged to a more stable currency can give you some certainty that the value of your tokens won't rise or crash suddenly. It's also an uncomplicated start in the crypto world.
For those who are a bit more into technicalities, it's an easy way to trade or save assets. You don't need a bank account to hold stablecoins, and they're easy and very cheap to transfer. They can be sent quickly around the globe, including to places where those fiat currencies may be hard to get or where the local currency is unstable.
At Vivid, you can always trade stablecoins for free as a Prime user, while as a Standard user, you'll only have to pay a 1.49% fee on every trade.
Don’t forget: if you want to take advantage of the slight price variations of stablecoins, you can always set up a target price buy order. Get the coin you want at the price you want!
Are stablecoins always stable?
Technically yes, but there have also been cases where things haven't been so reliable. For example, last June, the stablecoin TerraUSD crashed, leaving many people confused. Terra was an example of an algorithmic stablecoin that maintained its peg through another coin called Luna that fluctuated in price. After TerraUSD sank a little below $1 because of some large withdrawals, the algorithm started creating more Luna coins. But people continued to sell, pushing the algorithm into creating more and more Luna coins until over 6.5 trillion Luna coins were in circulation. Their value dropped from $1 each to $0.00001834. This highlighted the importance of collateral and how things need to have a backup. If you want to read more about it, we wrote about the Terra crash in more detail here.
Last year was not the best one for the crypto market which is why we've seen the rise of stablecoins, since they are technically less risky than regular cryptocurrencies. Still, despite what some people might want us to think, investing in the crypto world is still a risky decision, even if you're investing in a stablecoin. The Terra crash is the perfect example of that. Investing in a stablecoin with a reliable backup could be a good alternative for those who don't feel like risking it all. When investing in any kind of asset, it's always important to keep in mind that you should never invest what you're not ready to lose. And yes, a little bit of luck helps, but focusing on knowing what you can actually control is definitely a more reliable strategy than following hyped coins.
Any opinions, news, research, analyses, or other information contained on this website are provided as general market commentary, and do not constitute investment advice, recommendations nor should be perceived as (independent) investment research. The author or authors are employed by Vivid and may be privately invested in one or several securities mentioned in an article. Vivid Invest GmbH offers as a tied agent of CM-Equity AG the brokerage of transactions on the purchase and sale of financial instruments with the exception of those in the area of foreign exchange brokered by Vivid Money GmbH.