Cryptocurrency trading is still in its infancy. The new investment category has too little data for evaluating its past performance or fundamental analysis. However, it is well-known that cryptocurrencies are extremely volatile.
For example, Bitcoin rates have risen from >$6,000 to <19,000 within a month. In 2021, its price surged from $5,000 to $44,000. Cryptocurrencies’ value escalates and plummets by 10% within 24 hours, which is normal.
Swings of this scale are not regarded as stable, so a new class entered the crypto world. Stablecoin USDT [Tether] was designed to offer price stability and encourage wider use. The stable value without central control is attributed to a fiat currency of the same value. Tether or USDT is tied to the United States dollar but Bitcoin is not. Therefore, the value of Tether will stay more stable than BTCs.
If you desire to invest in stablecoin to avoid volatility, then you will also need to get a USDC wallet to store.
Is stablecoins trading risky?
Stablecoins appear low risk at face value when compared to popular but unsupported cryptocurrencies. Nevertheless, stable coins accompany some inherent risks and a few cryptocurrency challenges.
Just like cryptocurrencies, you need to store stable coins in a personal crypto wallet or with an exchange wallet. There is a possibility that the trading platform is non-secure or has some susceptibilities.
- Reserve risk
Reserves supporting a stable coin are the major element to stabilize its value. Without reserves the coin issuer will not guarantee stable coin value with confidence.
- Counterparty risk
Cryptocurrency is assumed to be highly decentralized but actually, you are handling several parties including banks that hold the reserves as well as the organization that issues the stablecoin. The involved parties must do things right to maintain the value of the stable coin.
- Lose confidence
If stablecoin is not sufficiently collateralized with hard assets [cash] then it can lose the hook against the reserve asset it is fastened to. A decline in stablecoin price can make traders lose confidence.
Trading rules to keep stablecoins investment safe
Check the issuer’s reserve report. If they don’t provide then it is a red flag. Read the tiny prints because even if they have a strong backing there are some liabilities to checkout.
For example, Tether’s reserve report [30th March 2021] revealed that there were more reserves than liabilities. When you read the details, you uncover the devils.
- 76% of reserves are held as cash equivalent or cash. [commercial paper]
- 13% is on secured loans.
- 10% is covered under precious metals, funds, and corporate bonds.
These assets act as cash but are not real cash! The commercial paper acts as cash only during emergencies. The cash or non-cash assets can quickly drop in value when the market crashes making stable coins less stable, especially when you need them the most.
Unless the stablecoin is committed to 100% holding of cash reserves there is no assurance that cash is available to redeem the stablecoins.