What Is the Best Crypto Stablecoin? (and is it a good investment?)

The name is somewhat self-explanatory – and yet in itself poses a huge contradiction: Stablecoins are obviously designed to be stable, but yet they’re Crypto coins, which – as we all know by now – is a notoriously volatile market.

But hey – stablecoins were designed specifically to bridge that gap: The idea behind them is to provide a relatively stable asset that often serves as a baseline for trading other currencies.

In a nutshell, a stablecoin is a cryptocurrency that is pegged (meaning linked) to the value of a Fiat currency. The top 10 stablecoins are all pegged to the US dollar, meaning – in theory – each coin should maintain the exact value of 1 US dollar (USD) at any given time. (It’s worth noting that there are smaller stablecoins pegged to other currencies like the Euro, for example – but the mechanism is the same: In this example, one coin is always meant to be worth one Euro.)

But as simple as that sounds – there’s more than one way of achieving that goal.

What are the different types of stablecoins?

Even though they’re all designed to achieve the same goal, there are three different types of stablecoins.

Fiat-backed stablecoins are the most common ones – and arguably the safest option. In this scenario, each stablecoin is backed by one USD in cash reserves. So, if a company issues 10 million stablecoins, they’d need to have $10 million in cash reserves – in case users decide to cash out their stablecoins.

Crypto-backed stablecoins are considered a tad riskier: Instead of providing USD as collateral, they do so with another cryptocurrency. For example, 10 million stablecoins could be backed by $10 million worth of BTC – or any other cryptocurrency, for that matter. The issue here is obvious: The value of the collateral fluctuates. Even BTC sometimes shows massive swings in either direction, technically increasing or decreasing the value of the collateral. Altcoins are even more prone to that, which is why a 50% buffer of crypto-collateral is common for stablecoins choosing this route.

Algorithmic stablecoins are the trickiest of the bunch: They may be backed by reserve assets but don’t have to be. They use advanced algorithms to keep the value pegged to USD, simply controlling supply to match the price – which, in a way, is not that different from how a central government bank controls the value of their currency. But unlike a central bank, issuers of an algorithmic stablecoin have little actual power to stabilize their coin in case of emergency because there often is no collateral to back it up: The collapse of TerraUSD, the most popular algorithmic stablecoin, in May of 2022 revealed the weakness of this particular approach.

So – there are three types of stablecoins. But which coins are the most popular ones out there?

What are the most popular stablecoins?

Let’s define popularity by market cap – and start from the bottom.

Number three is Binance USD or BUSD for short. Launched in September of 2019 by – you guessed it – Binance, it’s a fiat-backed stablecoin pegged to the US dollar. It’s the preferred stablecoin on Binance and is growing in popularity outside of the Binance ecosystem as well.

There is no supply limit, and as of late 2022, there were over 22 billion BUSD in circulation, meaning Binance is holding $22 billion in cash reserves as collateral.

Pros of BUSD:

• Fiat-backed
• Created by the world’s largest Crypto exchange
• Provides holders with benefits on Binance

Cons of BUSD:

• It’s still a proprietary coin – not suited for anyone not in love with Binance
• Moved from ERC20 (Ethereum) to first Binance Chain (BEP2) and now Binance Smart Chain (BEP20), taking it outside of the Ethereum-environment

Number two on the list is USD Coin or USDC. Released by a consortium called Circle in 2018, it’s grown to the number two spot on the list, with over 44 billion coins in circulation as of late 2022.

USDC is the only stablecoin that’s achieved the bridge to old-school Fiat money: In 2021, Visa announced they would allow USDC transactions to be settled on their network, potentially providing a significant increase in efficiency between the two worlds.

Pros of UDSC:

• Fiat-backed
• Ethereum-based token (ERC20)
• Increased legitimacy due to Visa partnership
• Publicly communicated and “verified” Fiat assets
• Independent issuer – not a Crypto exchange

Cons of USDC:

• Fiat collateral is “verified” but has not been officially audited
• Smaller, relatively unknown issuer, potentially increasing the risk of default or collapse

Number one on the list is USD Tether or USDT. Often referred to as simply Tether, this is the oldest stablecoin on the list, having been launched all the way back in 2014. It’s issued by Tether Limited, which in turn is owned by Hong Kong-based iFinex Inc, which also owns the Crypto exchange Bitfinex.

USDT is the go-to stablecoin for many users and platforms, with over 65 billion coins in circulation. It is and always was declared as fiat-backed, but a mixture of rumors and numerous investigations has revealed that this claim potentially can’t be fully verified or backed up.

Pros of USDT:

• The most popular stablecoin, widely accepted
• Available on 10 different blockchains
• Has been able to maintain a 1:1 peg in spite of negative headlines

Cons of USDT:

• Long-standing doubts about the actual cash reserves of the issuer

Are stablecoins a good investment?

The simple answer is no – because they’re not meant to increase in value by definition.

The more complex answer is – it depends on the perspective. For a user coming from a highly volatile Fiat currency, converting some assets into a USD-backed stablecoin might actually represent an investment of sorts, as the peg to the US dollar can provide stability often not given in smaller, more volatile Fiat currencies.

It’s essentially just taking one step further from converting local currency into USD (or Euro, for example), which is a practice often seen to de-risk a cash portfolio. However, no matter how stable they’re meant to be, stablecoins are still cryptocurrencies and, therefore, largely unregulated. As seen with TerraUSD, they can collapse and ideally should be used as a base for trading and not a store of value.

Which is the best stablecoin?

There is no clear, agreed-upon definition of what makes a stablecoin “good” apart from its stable peg to the USD (for the above-mentioned examples.)

The best stablecoin, therefore, depends on the use case.

For anyone simply wanting the easiest-to-obtain and most widely accepted stablecoin, USDT is likely the answer – with the ever-present risk that Tether brings with it.

For hardcore-Binancians, the answer clearly is BUSD, as it’s native to the Binance Smart Chain, is backed by the power of Binance, and is still rather widely accepted.

For anyone wary of both Tether and Binance, USDC is a solid choice: Accepted in more and more places every day, it’s issued by a (somewhat) independent entity and voluntarily offers a much higher level of transparency in terms of collateral than many others.

Summary

Stablecoins are cryptocurrencies pegged in value to a Fiat currency – mostly the US dollar. Every coin is always meant to be worth exactly one US dollar. Stablecoins often serve as a base for trading other cryptocurrencies as they are less volatile by design. The largest stablecoins are USD Tether (USDT), USD Coin (USDC), and Binance USD (BUSD), all of which are backed by Fiat cash reserves to the amount coins have been issued, even though – particularly with USDT – there are some doubts about the verifiability of those reserves.