Stablecoins have changed the game in the cryptocurrency market because they are more stable than other coins. Most crypto traders run to stablecoins when volatile cryptocurrencies are in a bear market. This allows them to avoid huge volatility until the cryptocurrency market settles. However, some crypto investors still doubt the level of security that stablecoins can offer. If you’re reading this, you are probably in the same shoes. Luckily, this article will answer some of the crucial questions you may have to help you decide whether stablecoins are a safe option for your crypto operations.
Can Stablecoins Crash?
It’s possible. Having enough reserves of its backing asset stored safely is one of the most important things that determines how stable a stablecoin is. For instance, one USDT equals one U.S. dollar. So, the reserves should be equal to the number of stablecoins that are available. This will keep prices stable and prevent them from going up and down. Therefore, if the issuer has anything less than 100% of the total stablecoins, there is a risk of a crash.
You may have heard that companies have been accused of misusing a lot of their backed reserves, which puts their stablecoin at risk. Some platforms also say they will keep the reserves in fiat currencies, but they end up using cryptocurrencies instead. This puts the stability of the stablecoin at risk because cryptocurrencies are volatile.
A good example is Tether. It was just accused of using about $800 million worth of its assets to cover losses. Tether is spending a huge amount of its own money, which could make USDT less stable. Even worse, some of the company's funds were backed by volatile crypto assets like Bitcoin. This goes against the rules since Tether’s USDT is a dollar-backed stablecoin that shouldn’t be collateralized with volatile assets. Tether was even banned from operating in New York and fined $41 million. It also refused audits, which raised even more questions from investors.
When investors find out that the company issuing the stablecoin isn't being transparent, they could pull out their money, which could randomly make the stablecoin less liquid. This is likely to cause a huge crash, which would affect your asset’s value. That’s why it is crucial to look for companies that have proven they have enough collateralized assets before investing with them.
Are Stablecoins Regulated?
Stablecoins have drawn a lot of investors, which is bad for the financial system because they aren't regulated yet. Some governments worry that stablecoins are being used for illegal things because they let people do business without going through banks. Because of this, some countries, like the U.S., are now trying to regulate stablecoins with new laws.
The idea behind these rules is to make sure that companies that issue debt have enough reserves to provide the needed stability. However, these regulations will likely tamper with stablecoin’s anonymity, which is one of the main reasons people use it.
Can Stablecoins Be Hacked?
Many investors store their stablecoins in digital wallets for easy accessibility. Although this makes transactions easier, it also increases the chances of your wallet being hacked and your assets being stolen. Your cryptocurrency exchange could also have flaws that hackers could use to get to your cryptocurrency assets.
Therefore, both your wallet and trading platform can be hacked. The best solution is to use an insured platform such as Nexo. Using a crypto exchange like this makes sure that your digital assets are safe and that you can easily get your money back if they are stolen.
Also, if someone accesses your private keys, they can easily transfer your stablecoins to other digital wallets. You can avoid this by keeping your private keys in specialized hardware wallets, USB drives, devices that don’t access the internet, or even offline on a notebook.
Which Is the More Stable Asset to Invest In?
Stablecoins don’t provide the same stability. Their backing assets are typically one of many factors that determine this. Below are the most stable options today:
Tether (USDT)
Tether is among the most popular stablecoins, currently having a market cap of $82,826,176,152. It has been around for almost a decade now. Also, Tether is dollar-backed, meaning you can exchange one coin for a U.S. dollar.
Tether is accessible and tradeable on approximately 31 crypto lending platforms.
USD Coin (USDC)
USDC is another huge stablecoin in the crypto market, with a $50,010,212,715 market cap. It is accessible on about 34 crypto lending platforms and has U.S. dollar backing. Plus, USDC is regulated, thus highly reliable and transparent.
Binance USD (BUSD)
BUSD is a Binance stablecoin with a market capitalization of $17,403,394,931. Although the dollar-backed stablecoin is only available on about 11 crypto lending platforms, trading it on Binance's site provides additional benefits such as better trading and lower conversion fees. BUSD is also highly secure and trustworthy, as its audits are published monthly.
Dai (DAI)
Dai is a popular and widely available stablecoin with a $8,694,008,566 billion market cap. It is a decentralized stablecoin that has Ethereum as its foundation. Dai can be found on the 31 crypto lending platforms.
Are There Any Other Risks of Stablecoins?
Economic Stability
Fiat backed stablecoins are seemingly the safest option since fiat currencies aren’t as volatile as cryptocurrencies. However, if they are pegged to a weak fiat currency, their value will likely fluctuate or even crash. Because of this, stable fiat currencies like the dollar typically back stablecoins. And even those aren’t really bulletproof.
Despite the fact that stablecoins backed by superior fiat currencies are less likely to crash, they are still susceptible to major economic events. Such events would automatically cause inflation and economic instability. This would make fiat backed stablecoins lose some value until everything goes back to normal. So, you will still have the same number of stablecoins in your wallet, but you will have less money to buy things with.
Centralization
When blockchain technology was first developed, its main goal was to prevent a single financial system from controlling all transactions. However, because centralized platforms distribute the majority of stablecoins, like USDT, this is no longer the case. So, these platforms control the supply and demand of their stablecoins. This means that if the platform crashes, your stablecoins will go down with it. Although this is unlikely to happen, you are better off diversifying your portfolio and having centralized and decentralized stablecoins like Dai. That way, even if one platform goes down, your other digital assets remain safe.
Conclusion
Stablecoins make it easier and safer for new and experienced crypto traders to do business without having to worry about price fluctuations. However, you shouldn’t just start using them without understanding the security level they offer. Hopefully, this article has helped you figure that out.
