Now that we have a better understanding of stablecoins on the backend, it’s time to dig at the best stablecoins to invest in 2021
A cryptocurrency is a medium of exchange based on blockchain technology. In short, blockchain is a highly convoluted monetary system that is used for maintaining and running digital currencies. It works as a digital ledger for transactions without any third-party interventions such as central banks.
Since cryptocurrency came into existence in 2009, with Bitcoin being the pioneer of digital currency, it was considered and speculated by some people as a groundbreaking invention and the future of money. Although in earlier years the currency was not much recognized due to its decentralizing nature and lack of credibility, as years passed by, the digital currency started to become word of mouth. Bitcoin began to gain popularity and value in the market, alongside that, other multiple digital currencies also began to emerge such as Ethereum (ETH), Cardano (ADA), and Litecoin (LTC), etc.
To broaden our insight, cryptocurrencies like Bitcoin have always been plagued by massive price fluctuations, making it nearly impossible to incorporate into our everyday transactions. The smaller the market capitalization an asset has, the more volatile its price will be. To make things simpler, imagine tossing a rock into a small pond and into an ocean sequentially. Obviously, the rock will have a greater impact on the pond. Similarly, the cryptocurrency market is a pond that is more sensitive to daily buy and sell orders than other assets like the U.S. Dollar. In a nutshell, you don’t know if in a week’s time the value will be 20% lower, 10% lower, or 10% higher. Interestingly, in 2010 a man from Florida bought two pizzas for 10,000 Bitcoins, and guess what? Those two pizzas today are estimated to be over $60 million.
With regard to constant uncertainty and volatility in prices, the first stablecoin was introduced in the year 2014. The first stablecoin, Tether (USDT), was introduced by a group called Tether Limited. Before we proceed further, it is important to understand the fundamentals of a stablecoin. A stablecoin is a collateralized cryptocurrency pegged to some external asset that provides a stable price and value of your digital currency.
There are three types of stablecoins: fiat-collateralized coins, crypto-collateralized coins, and non-collateralized coins.
A fiat-collateralized stablecoin is a cryptocurrency that is backed by a real-world currency like the USD. It works by depositing dollars into a bank account and issuing stablecoins in a one-to-one ratio against those dollars. When a user wants to liquidate their stablecoins back into USD, you destroy their stablecoins and wire them the USD. In simpler terms, the digital currency is worth $1 each and is more of a digital representation of the U.S. Dollar. Tether (USDT) is the most common and notable fiat-backed stablecoin.
A crypto-collateralized stablecoin, as it sounds, is backed by an already existing cryptocurrency. The ratio for a crypto-collateralized stablecoin is maintained by collateralizing with any supported cryptocurrency. For example, to acquire $1000 worth of DAI stablecoins you will have to retain $2000 worth of Ethereum (ETH) which turns out to be a 200% collateralized ratio. In contrast to a fiat-collateralized coin, a crypto-collateralized coin is regarded as unsafe, because it is subjected to volatility and price instability as it is backed by an already existing crypto-asset such as ETH which itself is prone to price instability.
non-collateralized stablecoin in simpler terms has no association with any external asset. A non-collateralized coin is backed by mathematical complexity based on smart contracts that use a concept of seigniorage shares to maintain the stability of 1. To refer, a stablecoin like Basis which is not pegged to any fiat currency uses a consensus mechanism to increase or decrease the supply of tokens on a need basis.
Now that we have a better understanding of stablecoins on the backend, it’s time to dig at the best stablecoins to invest in 2021. The nominations are as follows:
1. Tether (USDT)
Tether (USDT), launched in late 2014 and being the pioneer of stablecoins, is regarded as a potential stablecoin investment for the year 2021. To back this up, Tether (USDT) is regarded as the best stablecoin investment since it is backed by the U.S. Dollar and has a long history of leading the stablecoin race. Regardless of facing competition from new entrants like USDC, Gemini Dollar (GUSD), Paxos Token (PAX), and Dai Token (DAI) that were launched in the year 2017 and 2018, respectively, the Tether (USDT) remained dominant and continued to prosper. In terms of market capitalization and volume, to date Tether is significantly ahead with a market cap of estimated $45.89 billion and a volume of an estimated $104.07 billion.
2. USD Coin (USDC)
USD Coin (USDC), an Ethereum based stablecoin launched and co-founded by Circle and Coinbase in 2018, has been in the good books of investors provided the fact that it is the second-largest stablecoin in terms of market capitalization and volume. The USD Coin stands right below Tether (USDT) with a market cap of an estimated $10.8 billion and a volume of an estimated $1.59 billion. What makes USD Coin a good investment is that USD Coin provides complete transparency and accountability to its holders by releasing monthly audit reports. In addition, with the recent developments between Visa and USD Coin (USDC), the stablecoin aims to enhance the spending experience of its holders and create a unified digital currency supported by payment networks.
3. Paxos Standard (PAX)
Paxos Standard (PAX) is a stablecoin of Paxos Trust, launched in 2018. Paxos is a regulated blockchain infrastructure platform, building a new, open financial system. Paxos Standard (PAX) is a collateralized stablecoin, pegged with the U.S. Dollar at a one-to-one ratio. With respect to Paxo’s claim of a regulated blockchain infrastructure platform, Paxos Standard (PAX) is an FDIC insured (Federal Deposit Insurance Corporation) stablecoin, which negates the legitimacy question of the stablecoin, making it a credible and a trustworthy stablecoin.
To add, in a recent Series C investment funding, Paxos secured an investment of $142 million bringing their aggregate funding to more than $240 million. The massive funding highlights the possibility that Paxos could be on the move. Surprisingly, in the preceding year Paxos also partnered with PayPal enabling its US users to buy, hold, and sell cryptocurrency directly from their digital wallet. The partnership will also allow 346 million active PayPal users to trade in the cryptocurrency market, which will play a contributing role in boosting the cryptocurrency’s future prospects.
To sum up, it will be exciting to see how these stablecoins will act in 2021. The market seems to be critical as it weighs towards both the cryptocurrencies, the traditional and the stablecoin. On one hand, the traditional crypto is being highly regarded by tech giants such as Tesla, who have a dominant influence on the market, while on the other hand, stablecoins are navigating and seeking solutions to conventional cryptocurrency’s loopholes to make their way through.