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| “Based on my own personal experience – both as an investor in recent years and an expert witness in years past – rarely do more than three or four variables really count. Everything else is noise.” - Martin Whitman |
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In today's issue: It's the battle for the digital dollar.
Last year, we did a deep dive on the top stablecoins for investors, but a lot of money has flowed under the bridge since then.
The quick takeaways are that algorithmic stablecoins (like UST) generally don't work, fully-collateralized stablecoins (like USDC) generally do, and hybrid stablecoins (like DAI) are somewhere in between.
Now we have a new factor: regulatory enforcement.
When the government ordered Paxos Trust to stop issuing Binance USD (BUSD), it sent shockwaves through the industry. If the SEC is now calling stablecoins securities, is anything safe?
For our updated research and ratings on the state of stablecoins, read on. |
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| | | Must Read Today's most important story for crypto investors. |
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It's common for people to say that we're still in the "dot-com" era of crypto, circa 1998.
In this piece, Noelle Acheson argues that we're still in the ARPANET days of crypto, circa 1970.
She points out that world-changing technologies often arrive way before the world is ready for them. More than two decades occurred between the first version of the internet and the first public websites.
She points to the proliferation of new crypto protocols and standards as proof. We haven't even agreed on the basic technology yet.
Asking how we will know when it's no longer early, Acheson writes:
When will we no longer be early? When mainstream coverage is as much about adoption and new applications as it is about asset price moves. When the technology ceases to intimidate the crypto curious. When regulators see new financial applications as opportunities rather than threats.
Investor takeaway: We agree with Acheson. It's early, and it's good to be early so long as you're patient. Good things come to those who wait. |
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| Premium Power-Ups Level up your crypto investing game. |
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Tonight at 6:30 pm ET: New Members-Only Workshop!
If you're wondering what's behind bitcoin's price rise during the past few months, much of the excitement is around Layer 2 solutions that allow you to build things on top of bitcoin.
One of the most exciting of these is Stacks (STX).
Tonight at 6:30 pm ET, we'll be deep-diving into Stacks, showing you examples of real-life applications being built on top of bitcoin, and sharing our research on investing in STX all in an informal Zoom setting where you can ask questions.
Premium members: This members-only workshop is happening tonight! You can RSVP here.
Not yet a Premium member?Sign up now for just $10 a month and get access to the live event, plus our complete on-demand library of past workshops. |
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| Top Stablecoins for Investors in 2023 by Daniel Joel |
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Executive Summary: Stablecoins are important bridges between the traditional and crypto economies. For the crypto investor, they can offset the volatility of crypto while providing higher interest rates than legacy banks.
Look for stablecoins that are large (>$1B), reputable, and have been around for several years. Understand the risks with stablecoins (we list the four big risks below), and never invest more than you're willing to lose.
In this State of the Stablecoins 2023, we’ll cover why people are using stablecoins, the risks and benefits, and our top-rated stablecoins for crypto investors.
Top Stablecoins by Total Value
To see which stablecoins are the most widely used, here are the top stablecoins by market cap as of this writing:
Tether (USDT): about $75 billion US Dollar Coin (USDC): about $50 billion Binance USD (BUSD): about $10 billion Dai (DAI): about $5 billion TrueUSD (TUSD): about $1 billion
Top Stablecoins by Daily Active Users
Good investors look at the amount of money invested in each stablecoin. Great investors look at how many people are actively using each stablecoin over time: |
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| Tether (USDT): 89.41K daily active addresses, rising. |
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| US Dollar Coin (USDC): 37.88K daily active addresses, steadily rising. |
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| Binance USD (BUSD): 1.55K daily active addresses, beginning to trend lower. |
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| Frax (FRAX): <500 active addresses, holding steady. |
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Dai (DAI): 3.48K daily active addresses, holding steady.
Top Stablecoins by Analyst Rating
Price and users aren't enough. At Bitcoin Market Journal, we preach both quantitative and qualitative analysis (both numbers and judgment). Using our Blockchain Investor Scorecard, here are our analyst ratings of the top stablecoins:
USDT Investor Scorecard USDC Investor Scorecard BUSD Investor Scorecard DAI Investor Scorecard
Are Stablecoins Good Investments?
Stablecoins can be valuable investments as part of one's overall portfolio, but as their prices don't change, they're obviously different kinds of investments versus other crypto assets.
Let's say you decided to invest in bitcoin five years ago when the price was $11,500 (we always encourage long-term investing of five years or more). Today, that investment would have roughly doubled. |
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Bitcoin five-year returns: investments increased 100%.
Meanwhile, you would have had plenty of terrifying ups and downs like the boom market of 2017 followed by the "crypto winter" of 2018 and 2019, the exhilaration of 2020 followed by the exhaustion of 2021, and so on.
If, on the other hand, you had placed your money in a steady-growth stablecoin account earning 5%, you would have had more modest growth of 28%, but with far less stress.
With stablecoins, you can also take advantage of compounding interest, which over a lifetime, builds very large fortunes, and y have the satisfaction of knowing that, like a savings account, you can withdraw your money any time.
Which Type of Stablecoin is Best? (The Vault Analogy)
The smart investor will ask, "Which type of stablecoin is best for holding its value? Which stablecoin can I trust?"
All stablecoins are "backed" by something: dollars, gold, or even other cryptocurrencies. To find the "best" stablecoin, we must ask, "What is backing the value of the stablecoin?" |
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Best: Fiat-backed stablecoins. Imagine a bank vault. Every time you put in a U.S. dollar, it goes into the vault and a stablecoin is issued to your digital wallet. When you want to redeem the stablecoin, a dollar is pulled out of the vault and the stablecoin is burned.
Such assets are fiat-backed stablecoins (fiat money = government-issued money), and they are by far the most successful and popular types of stablecoins. They give investors the confidence of a government-issued currency, though they are not issued by the government.
The most popular fiat-backed stablecoins are Tether (USDT) and US Dollar Coin (USDC). Good: Commodity-backed stablecoins. These are backed by commodities, typically gold or other precious metals. Imagine you put one dollar in, they buy one dollar's worth of gold, put it into the vault, then issue a stablecoin.
These can be useful during times of financial uncertainty (when many investors flock to gold). A gold-backed stablecoin can be an easy way of "holding" gold without having to buy the physical stuff. It's gold in cryptocurrency form.
Note these are "stable" only against the value of the underlying commodity, so as the price of gold fluctuates, so does your gold-backed stablecoin. Popular commodity-backed stablecoins include Tether Gold (XAUT) and Paxos Gold (PAXG). Uncertain: Crypto-backed stablecoins. These are crypto assets backed by other crypto assets. You probably already see the problem. If the entire crypto market crashes, what happens to these stablecoins?
To solve this, most crypto-backed stablecoins require lots of collateral. You may need to put in $2 of collateral to get $1 of the stablecoin, which makes them more complicated and unsuitable for many investors.
While the top crypto-backed stablecoins have held their value through various boom and bust cycles, they carry (in our view) extra levels of risk (see below). The most popular crypto-backed stablecoin is Dai. Risky: Algorithmic stablecoins. These use complicated algorithms to preserve their stability. When the price gets too high, they try to motivate people to sell, and vice versa. That's the theory, at least. They're "backed" by code.
Without any underlying assets, these stablecoins ultimately rely on trust in the computer code, and even the most elegant code is little match for human emotion, which the crypto market runs on. |
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What are the Risks of Stablecoins?
The rewards of stablecoins (ease of use, handsome interest rates) must be weighed against the risks. There are four risks, and most investors focus on the wrong ones. Risk #1: They may not be fully backed. This is the one that gets all the attention. If there's a panic, and everyone wants to withdraw their stablecoins at once and there's not enough money in the vault, you could lose your money (unlike a savings account, there's no FDIC insurance). In practice, this has rarely happened with fiat-backed stablecoins.
Fiat-backed stablecoins try to reassure investors by having outside auditing firms attest that they own 100% of the money. This should give investors an added degree of confidence, though you still have to take someone's word for it. Risk #2: They may lose their peg. The "peg," or the tying of one stablecoin to one U.S. dollar, can be lost, so a $1.00 stablecoin might be worth $1.06 or $.92. This happens most frequently with algorithmic stablecoins, where theoretical code is no match for human emotion.
You can look at long-term stability just by viewing price history on a site like CoinMarketCap. In practice, the top stablecoins are pretty darn stable. |
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| Look for a price history like this (increasing price stability over time)... |
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... instead of this (decreasing price stability over time).
Risk #3: Regulation. This is a much bigger risk, but it gets far less attention. Your government could simply declare stablecoins illegal or (more likely) tax them so heavily as to stamp them out. You would probably still be able to get your money out, but panic would certainly ensue.
This is why smart investors watch which way the political winds are blowing. The government ordering Paxos to stop issuing Binance USD is a big warning flag for stablecoin issuers and a risk for all crypto investors. Instead of outlawing crypto, the government could simply choke off access between fiat and crypto by shutting off banking services and closing down stablecoins.
However, there are longer-term reasons for hope. In the U.S., the Executive Order on Digital Assets is a positive sign. It shows the U.S. is likely to try to fold stablecoins into the existing economy rather than stamping them out. The Stablecoin TRUST Act is another positive sign for the long-term future of stablecoins.
Risk #4: Inflation. The #1 risk is the one that rarely gets attention among crypto nerds. When you invest in a fiat-backed stablecoin, you're still investing in the fiat currency. If you're earning 6% interest, but the inflation rate is 8%, you're still losing 2%.
This is why crypto-backed and algorithmic stablecoins are even riskier than fiat-backed stablecoins. You have interest risk plus technology risk. Unless the reward (i.e., the interest rate) is significantly higher, you're taking on more risk for the same reward.
Plain English: If (fiat-backed) USDC is paying the same interest as (crypto-backed) DAI, you're taking on more risk with DAI for the same reward. Demand a "risk premium" for DAI. Otherwise, go with USDC.
Investor Takeaway
Stablecoins are not only integral parts of the crypto ecosystem. They're also useful tools for investors as they build long-term wealth. They can be used to lower trading costs, they serve as excellent on and off ramps for crypto, and they can be used to generate yields better than those available from fiat savings.
Stick with stablecoins that are fully-collateralized, and keep a close eye on how governments treat stablecoins going forward. The industry relies on them. |
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Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It's created by John Hargrave, Nick Marinoff, Steve Walters, Anatol Antonovici, Matthew Du, Daniel Joel, and Preetam Kaushik.
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