While stablecoins have been around for more than a decade, it’s only recently that they have really burst into the spotlight. The stablecoin industry is now valued at $250 billion, and could be on its way to $2 trillion within just a few years.
In fact, according to the latest Motley Fool stablecoin research, 10 different stablecoins now have market caps of $450 million or more. So investors have plenty of choices. Here’s what you need to know before getting started.
This might be obvious, but the price of a stablecoin will always be $1. It doesn’t matter how popular the stablecoin becomes, how many people use it, or how many business use cases there are for it. Your stablecoin will always be worth $1. Even if you buy and hold that stablecoin for decades, it will still be worth just $1 at the end of that period.
And that’s the way it was meant to be. It’s a feature, not a flaw. Stablecoins were created to eliminate some of the risk and volatility of investing in crypto. Since stablecoins are pegged 1:1 to the dollar, you can always swap one stablecoin for $1. This makes it very easy to move money between the worlds of traditional finance and blockchain finance. It also ensures that you can use stablecoins for transactions, due to the price stability.
But all hope is not lost if you want to make money with stablecoins. You could, for example, invest in the issuers of the stablecoins. For example, consider the difference between investing in USDC (USDC 0.00%), the world’s second-most-popular stablecoin, and investing in Circle Internet Group (CRCL -1.58%), the issuer of USDC.
Since it went public on June 5, the price of Circle has soared by nearly 130%. However, the price of USDC is still just $1. You might get rich investing in Circle, but you definitely won’t get rich investing in USDC.
Judging by their name, you might assume that stablecoins are risk-free investments. What could possibly go wrong with such a “stable” investment?
As it turns out, a lot. The most glaring risk is the potential for a stablecoin to lose its peg to the U.S. dollar. In other words, instead of being able to exchange your stablecoin for $1, you might get significantly less. And, if a market meltdown occurs, you might get nothing. This actually happened in 2022, when the stablecoin TerraUSD dramatically lost its peg to the dollar. Within a span of 24 hours, it was trading for mere pennies.
Thus, it’s essential to understand how an issuer is choosing to back its stablecoin. The two biggest stablecoins — Tether (USDT -0.00%) and USDC — are backed entirely by cash and high-quality cash equivalents. However, prior to the passage of the Genius Act this summer, other issuers were using a mix of just about everything — including volatile cryptocurrencies, low-grade commercial paper, and gold — to back their stablecoins.
At first glance, it might seem like all stablecoins are the same. After all, they all trade for $1, right? But that’s hardly the case.
For example, some stablecoins are optimized for cross-border transactions. Some stablecoins are designed to maximize yield via various decentralized finance (DeFi) protocols. Some stablecoins provide liquidity to help crypto traders move quickly between various cryptocurrencies and across different blockchains. And some stablecoins are pegged to a different fiat currency other than the dollar, such as the yen or euro.
Thus, the choice of which stablecoin is best for you depends on how you plan to use it. If you live in Paris or Tokyo, a dollar-pegged stablecoin might not make sense for you. That being said, you really can’t go wrong investing in either of the two stablecoin behemoths (Tether, USDC). You can use those stablecoins for just about anything, and they’re highly liquid.
Now that the Genius Act has passed, I’m fully expecting a new range of use cases to emerge. For example, based on previous media reports from the likes of the Wall Street Journal and Fortune, the names of companies considering stablecoin launches of their own include Amazon (NASDAQ: AMZN), Walmart (NYSE: WMT), Uber (NYSE: UBER), X, Airbnb (NASDAQ: ABNB), and Meta Platforms (NASDAQ: META). It’s hard to believe that all of them will create cookie-cutter stablecoins. Instead, they’ll create stablecoins that are optimized for how they do business.
So, as they say, always read the fine print when you choose to invest in stablecoins. A little due diligence upfront could save you a lot of headaches further down the road.
