Are Stablecoins Safe
Crucial questions to help you decide whether stablecoins are a safe option for your crypto operations.
Stablecoins have become a game changer in the crypto market as they offer more stability than other cryptocurrencies. 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 security level 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. One of the major factors that determine a stablecoin’s stability is having enough reserves of its backing asset stored safely. For instance, one USDT equals one U.S dollar. So, the reserves should match the number of available stablecoins to maintain stability and avoid price fluctuations. Therefore, if the issuer has anything less than 100% of the total stablecoins, there is a risk of crashing.
You have probably heard of companies that have been accused of using a huge percentage of their backed reserves, hence risking their stablecoin’s stability. Some platforms also promise to store the reserves in fiat currencies but use cryptocurrencies instead, risking the stablecoin’s stability due to volatility.
A good example is Tether. It was recently accused of using approximately $800 million of its underlying asset to cover losses. Tether using such a huge amount of its funds that it could easily destabilize USDT. Even worse, the company also collateralized some funds with volatile crypto assets such as 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 realize a lack of transparency from the issuing company, they could withdraw their investments, thus randomly bringing down the stablecoin’s liquidity. 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 proved they have enough collateralized assets before investing with them.
Are Stablecoins Regulated?
Stablecoins have attracted many investors, hence threatening the financial system since they are currently unregulated. Some governments fear that stablecoins are being used in illegal activities as they allow people to transact without even involving financial institutions. Therefore, some countries such as the U.S. are now trying to implement laws to regulate stablecoins.
These regulations are expected to ensure issuing companies have enough reserves to deliver 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 stolen. Your crypto exchange could also have vulnerabilities that cybercriminals might use to access your crypto assets.
Therefore, both your wallet and trading platform can be hacked. The best solution is using an insured platform such as Nexo. Using such a crypto exchange guarantees your digital assets are safe and can be easily compensated if 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. This is usually determined by different factors, including their backing assets. Below are the most stable options today:
Tether is among the most popular stablecoins, currently with a $82,826,176,152 market cap. It has been around for almost a decade now. Also, Tether is dollar-backed, meaning you can convert one coin for a U.S. dollar.
Tether is available on about 22 crypto lending platforms, making it easy to access and trade with.
USD Coin (USDC)
USDC is another huge stablecoin in the crypto market with a $50,010,212,715 market cap. It’s backed by the U.S. dollar and is available on around 24 crypto lending platforms. Plus, USDC is regulated, thus highly reliable and transparent.
Binance USD (BUSD)
BUSD is a Binance issued stablecoin with a $17,403,394,931 market cap. The dollar-backed stablecoin is only available in about 8 crypto lending platforms but trading it on Binance’s site gives you more benefits such as better trading and conversion fees. BUSD is also highly secure and trustworthy as its audits are published monthly.
Terra USD (UST)
UST is among the latest stablecoins in the market that have grown rapidly. This coin currently has a $17,739,568,979 billion market cap and is only available on about 5 crypto lending platforms. It is also decentralized, hence making it an excellent option if you don’t want centralized coins.
Dai is a popular and widely available stablecoin with a $8,694,008,566 billion market cap. It is a decentralized stablecoin that is backed by Ethereum. You can find Dai on about 20 crypto lending platforms.
Are There Any Other Risks of Stablecoins?
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 often or even crash. This explains why most stablecoins are usually backed by stable fiat currencies such as the U.S dollar. And even those aren’t really bulletproof.
Although stablecoins backed by superior fiat currencies can’t crash easily, they can still be affected by huge 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. Therefore, you will still have the same amount of stablecoins you had in your wallet but reduced purchasing power.
The initial aim of creating blockchain technology was to prevent a single financial system from controlling all transactions. However, stablecoins have changed this rule since most popular ones, such as USDT, are provided by centralized platforms. So, these platforms control the supply and demand of their stablecoins. This means that if the platform crashes, your stablecoins 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.
Stablecoins provide an easier and more secure way for new and veteran crypto traders to transact without worrying about volatility. However, you shouldn’t just start using them without understanding the security level they offer. Hopefully, this article has helped you figure that out.