Which of these USD-backed stablecoins is a more reliable investment?
Stablecoins, which are usually pegged to fiat currencies like the U.S. dollar, are a lower-risk alternative to top cryptocurrencies like Bitcoin (BTC 0.73%). Instead of being valued by their scarcity or the popularity of their developer ecosystems, stablecoins are designed to match the stable value of their underlying assets.
The two most popular stablecoins, Tether (USDT -0.01%) and USD Coin (USDC 0.00%), are both pegged to the U.S. dollar. But unlike U.S. dollars, these stablecoins can be held without a bank account, used for faster and cheaper cross-border transfers, and preserve savings in countries with currency devaluation issues.
Both stablecoins can be lent out on centralized exchanges like Coinbase Global (COIN -0.31%), decentralized finance (DeFi) pools like Stargate, and other stablecoin-specific staking platforms to earn higher yields than traditional savings accounts and CDs. They also can be used as a bridge currency to support trades between volatile or illiquid assets. But which of these popular stablecoins is a better buy right now?
USDT, with a market cap of $168 billion, is the world’s largest stablecoin. Tether, a subsidiary of Hong Kong-based iFinex (which also owns the Bitfinex cryptocurrency exchange) launched the coin in 2014. It’s backed by a mix of cash, commercial paper, and other assets instead of a simple combination of U.S. dollars and Treasury bills.
Tether only publishes opaque summaries of its reserves instead of submitting itself to regular audits, and its Chinese ownership is controversial. It was once backed by billions of dollars in Chinese commercial paper (before pivoting to U.S. Treasuries), it drove its early transactions through Chinese-owned banks in Taiwan, and some of its executives have strong ties to China. That structure prevents firm oversight controlled by U.S. regulators, but its first mover’s advantage and liquidity still make it the top stablecoin.
USDC, which was issued by the peer-to-peer payments company Circle (CRCL -8.71%) and previously co-managed by Coinbase, has a market cap of about $72 billion. It’s backed on a 1-to-1 basis by U.S. dollars and short-term U.S. Treasuries, its reserves are held by big financial institutions like BlackRock (BLK -1.10%) and Bank of New York Mellon (BK -0.99%), and it submits monthly attestations (reports from independent auditing firms) for its reserves.
USDC’s support from regulated institutions and transparent reserves make it a more conservative play that is less exposed to regulatory crackdowns. But it also isn’t as widely traded as USDT, which is supported on dozens of popular blockchains like Ethereum (ETH -0.51%). However, USDC has been gradually gaining momentum on some Layer-2 networks and DeFi ecosystems.
USDT and USDC both trade at $1, but they target different types of investors. USDT is generally a better option for investors who want the best liquidity across multiple trading platforms, reliable transfers across different blockchains, and a standard token for DeFi applications.
USDC is probably a better choice for investors who are concerned about USDT’s ownership, regulatory, and auditing issues. That makes it a better choice for institutional investors or conservative investors who don’t plan to actively trade the coin or use it for DeFi transactions.
As for earning interest, USDC usually nets slightly higher yields on lower-risk centralized platforms than USDT because it’s considered the safer and more transparent token. But on higher-risk niche platforms, USDT can net a higher yield than USDC because it’s more actively traded. On centralized platforms like Coinbase and Binance, USDT and USDC can both earn yields of 4% to 12%, depending on how long you lock up your tokens. That’s significantly higher than the U.S. Treasury’s 10-year yield of 4.3%.
Tether and USD Coin should both outlast other stablecoins that aren’t firmly pegged to their underlying assets. But if I had to choose one over the other, I’d stick with USDC because it’s backed by reliable institutions and less exposed to regulatory headwinds than Tether.
