Cryptocurrencies are famous for being volatile assets, which means there are plenty of opportunities in the space for experienced traders. If investors plan to hold for the long term, they can expect a wild ride.
Stablecoins, a class of cryptocurrencies that provide investors with price stability for the value of fiat currencies, provide investors with a safe haven when market turbulence strikes but can represent missed opportunities over time.
Speaking to Cointelegraph, several experts have said that retail investors should approach cryptocurrencies with a “pay yourself first” attitude and that allocation of up to 5% in crypto while allowing “marginal returns” is relatively “safe.” “Should be.
Stablecoins are completely different: no “marginal return” can be expected from holding assets pegged to the value of the US dollar only, although yields can be achieved using the decentralized finance (DFI) protocol at double-digit annual percentage rates (APRs). ) can be reached. However, these protocols lead to high risk.
Different stablecoins, different risks
Not all stablecoins are created equal. The largest stablecoins on the market – USD Coin (USDC), Tether (USDT) and Binance USD (BUSD) – are backed by cash or assets with equal value by centralized companies. This means that for every token in circulation, there is one dollar in cash, cash equivalents or custodial bonds.
For example, other stablecoins such as Dai (DAI) and TeraUSD (UST) rely on different mechanisms. DAI is crypto-collateralized and ensures that it can maintain its peg by being overcollateralized. It involves economic mechanisms that stimulate supply and demand to raise its price by $1.
UST, on the other hand, is a non-collateralized algorithmic stablecoin. An underlying asset does not hold it back, as it works through algorithmic expansion and supply contraction to maintain its peg. Terra, the blockchain behind UST, is building up reserves specifically for the stablecoin. So far, it has already bought around 40,000 BTC worth over $1.6 billion and over $200 million in Avalanche (AVX).
Marissa Kim, general partner at Abra Capital Management – the asset management arm of crypto investment firm Abra – told Cointelegraph that the firm “holds USDC and other US-regulated stablecoins as reserves in bank accounts,” as these are “necessary.” ” Huh. To prove on a regular basis that they are fully collateralised.”
For Kim, decentralized stablecoins like DAI and UST “could pose other risks,” as volatile markets could see DAI lose its peg to the USD. He added that its governance is “by the MakerDAO community, and no one knows who maintains and controls this protocol and where voting power may be concentrated.”
Speaking to Cointelegraph, Adam O’Neill, chief marketing officer of crypto trading platform Bittrue, said that “the role of USDC and USDT” in the cryptocurrency space “is synonymous with the role of the US dollar in the traditional financial ecosystem.”
O’Neill added that investors should use stablecoins “as a hedge when trading and storing their assets.” He added:
“The security approach of stablecoins should not be compared, as both the centralized and decentralized versions are secure in their own right. However, it is not uncommon that hackers create both classes of stablecoin tokens to offer troublesome products. exploit vulnerabilities in the given protocol.”
For O’Neill, how much investors should allocate to stablecoins is a decision that is up to them and depends on their investment goals. Kent Barton, Tokenomics lead at ShapeShift DAO, told Cointelegraph that while each stablecoin has its own risk profile, there are a few things investors should keep in mind.
For one, centralized stablecoins such as USDC and USDT can be easily converted back to USD, but the entities behind these coins “could potentially blacklist certain addresses, for example, on demands from legal entities.” in response to.” Barton said there have long been concerns about USDT’s backing, but it has kept its peg so far:
“USDT has the advantage of being time-tested: it is the longest-standing stablecoin. It has deep liquidity across centralized exchanges and multiple DeFi platforms.”
Decentralized stablecoins such as DAI and USDT, Barton said, are more transparent due to the nature of the blockchain they create. Nevertheless, there are other risks as well, including volatile markets that threaten over-collateralization of DAI.
For Oleksandr Lutskevich, founder and CEO of crypto exchange CEX.io, the security of each stablecoin depends on how security is defined. In terms of the code, technical audits should cover the risks of more sensitive stablecoins, while in terms of the reliability of moving funds from A to B, most are known for purpose.
As for the ability of stablecoins to maintain their peg against the dollar, Lutskevich said how that peg is maintained should be the main focus on investors’ minds.
Stablecoin DeFi Yield: Too Good To Be True?
While only holding stablecoins ensures that cryptocurrency investors are not dealing with market volatility, it also means that they are not really making any kind of return unless they put their stablecoins to work. Do not put
When it comes to stablecoins, there are several options such as lending them on centralized exchanges or blue-chip decentralized finance protocols with relatively low yields – often less than 5% – which are relatively safe. Switching to riskier protocols, or employing complex strategies to increase yields, can lead to higher returns and greater risk.
For example, it is possible to see gains of over 30% for Waves’ Neutrino USD (USDN) stablecoin, which recently broke its peg and dropped below $0.80 before recovering.
When asked whether investors should lend their stablecoins or add them to decentralized exchanges (DEXs) liquidity pools, ShapeShift DAO’s Kent Barton explained that the DeFi protocols bring smart contract risks into the equation, which need to be considered. is required.
For Barton, protocols that “have been around for more than a few months and have a track record of protecting billions of dollars in value are pretty safe.” However, “there is no guarantee of future security and stability.” Protocols with high rewards, he said, are risky.
Lutskevich suggested that investors should first understand what they are investing their money in:
“Just because it is DeFi, investment principles do not change. And, one of the fundamental investing principles is this: Before proposing any strategy, you must thoroughly understand one’s risk preferences and individual circumstances.
For Lutskevich, investors’ capital, time frame, goals and risk tolerance must also be weighed when considering holding or moving stablecoins to earn yields.
For O’Neill, it is “generally advisable that stablecoins should be positioned to leverage yields from lending platforms,” although investors should be “ready to jump at any investment opportunity.” should remain.”
Stablecoins, in part thanks to the DeFi space, offer investors a plethora of opportunities across a multitude of blockchains. Using them outside of centralized exchanges may require some specific knowledge, without which investors can lose their funds, for example, by sending them to the wrong type of address.
Risk tolerance and sophistication
Speaking to Cointelegraph, Carlos González Campo, research analyst at investment product issuer 21Shares, said that stablecoins provide investors with “access to a global value transfer network, much the way the Internet gave rise to a global and open network for information.” “
Campos said February’s Consumer Price Index (CPI) data in the United States rose 7.9% year-on-year, meaning people are losing their purchasing power at a rate that’s higher in four decades. Has not been seen.
The analyst said that what investors do with their stablecoins depends on their level of risk aversion and sophistication because the DeFi platform “is still lacking in user experience today” that allows users to passively earn on their holdings. lets do. Campos added:
“The most obvious example is seed phrases, which are impractical and probably will not achieve mass adoption. This is why industry leaders such as Vitalik Buterin have emphasized the need for widespread adoption of social recovery wallets, which are seed Instead of relying on phrases, rely on parents.
Marisa Kim of Abra Capital Management echoed Campos’ views, as she said that there are possible bugs and other exploits in the DeFi protocol that often pay out higher yields in the protocol’s native tokens. They are “often highly volatile and may not be very liquid.”
As for Marissa, some investors may be willing to take on the additional risk, though others “will be more concerned with principal protection.”
Whatever strategy investors choose, it is clear that stablecoins are a major part of the cryptocurrency ecosystem. More risk-averse investors may find that they rely only on the most transparent centralized stablecoins that offer limited opportunities, while more enterprising investors may prefer higher yields and higher risk.
Over time, the influence of stablecoins in the cryptocurrency space only continues to grow, so it is important that investors understand what they are dealing with and the risks associated with stablecoins they choose to HODL with and what they do with them. Choose.
The views and opinions expressed here do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, so you should do your own research when making a decision.
