As of Aug 2021, the total market cap of stablecoins sits at about $120 billion. There are dozens of stablecoins to choose from, either to earn yield on or as a trading pair to buy other coins.
With so many options, it can be confusing to decide which stablecoins are safe to hold. We’ve compiled a list of the 5 best stablecoins to help you make that decision.
In general, you want to choose stablecoins based on how long they’ve been around, their circulating supply, and how much trading volume they have.
You can check out a full list of stablecoins on CoinMarketCap to see these metrics. The bigger the circulating supply and the more trading volume the better, because it shows there is demand for that coin.
You also want to look for stablecoins with more trading pairs, ie. USDC/BTC, USDC/ETH, USDC/LINK, etc, as this shows greater demand for that stablecoin which implies the market deems it trustworthy.
With that said, let’s get into the safest stablecoins to hold.
Many consider USDC (USD Coin) to be the safest and most legitimate stablecoin on the market right now. The coin was launched in September 2018 by fintech company Circle and has quickly grown to be the #2 largest stablecoin with over $25 billion circulating, after Tether (USDT).
The primary reason USDC is considered the safest stablecoin is because of its status as a regulated stablecoin, something that not every stablecoin can say the same for (including Tether). USDC is considered a stored value instrument, which is regulated by state money transmission laws. Circle and USDC are thus overseen by 46 state regulators, which regularly examine their activities.
USDC is audited every month by accounting firm Grant Thornton, which verifies and attests that Circle’s reserve balance is equal to the circulating USDC. As of July 2021, 61% of USDC is backed by “cash and cash equivalents,” 13% is backed by foreign-issued CDs, 12% by US Treasuries, 9% by commercial paper, and the rest by municipal and corporate bonds.
USDC works across the biggest blockchains, such as Ethereum, Algorand, Solana, and TRON. The coin is supported on all of the largest crypto exchanges like Binance, Coinbase, BlockFi, etc. which makes it accessible and easy to use.
GUSD (Gemini Dollar) is backed by Gemini, one of the leading crypto exchanges and pioneers of the field. Gemini is considered one of the most trustworthy companies in the crypto industry, and their stablecoin is no different.
As of August 2021, independent accounting firm BPM LLP has attested that GUSD is fully backed 1:1 with US Dollar balances. The current circulating supply is $247 million USD.
Gemini is licensed by the NYDFS and has to meet the same standards a bank would. While GUSD doesn’t have as many trading pairs as some of the other stablecoins, it’s still one of the safest to hold or earn yield on. If you’re actively trading crypto then USDC or USDT would be better.
USDT (Tether) was one of the first stablecoins ever created, and is by far the most widely used stablecoin today with over $63 billion in circulating supply.
Despite its position as the #1 stablecoin, Tether is a major source of controversy in the crypto world. Since its inception, it’s received an unprecedented amount of FUD (fear, uncertainty, doubt). Many allegations have been raised suggesting USDT was not fully backed by Tether’s cash reserves.
Tether has always fought back against this notion, but has taken major strides to put these allegations to rest once and for all.
Over the years, they’ve hired various independent accounting firms to audit their reserves. The latest accountant report from March 31, 2021 by Moore Cayman asserts that Tether’s $41 billion USD circulating supply was fully backed by cash and cash equivalents.
In Feb 2021, Tether settled its lawsuit with the NYAG with an $18.5 million fine. As part of the settlement, Tether and its sister company Bitfinex agreed to stop trading activity in New York and submit quarterly transparency reports.
As part of those transparency reports, Tether recently revealed the breakdown of its reserves. As we can see in the picture below, 76% of Tether’s reserves are held in cash and equivalents, 13% secured loans, 10% corporate bonds and metals, and rest other.
Of the Cash and Cash equivalents, about half is comprised of commercial paper, which is corporate debt that theoretically is easy to convert to cash. As with all forms of cash equivalents though, it’s not 100% cash so there’s always a risk during certain market conditions.
To sum up, Tether has always had a bit of controversy around it. Despite that, though, its circulating supply has continued to increase which means the market trusts it. If you’re actively trading crypto, USDT is the best stablecoin as it supports the most trading pairs and is the most liquid. The demand for USDT as a result is also very high, which provides great opportunities to earn yield on USDT.
If you don’t feel comfortable holding Tether for prolonged periods of time, consider one of the other stablecoins in this article like USDC or GUSD.
BUSD (Binance USD) is a relatively new stablecoin, launched on Sep 2019, through a partnership by Binance and Paxos (creator of the PAX stablecoin).
What makes BUSD attractive as a safe stablecoin to hold is its backing by two of the most prominent crypto companies, along with the fact that it’s approved by the NYDFS.
Every month, auditing firm Withum verifies and attests to the BUSD reserve balance. As of June 30, 2021, they’ve confirmed there is about $10 billion in circulating BUSD supply backed 1:1 with USD in reserve accounts at US banks.
Dai is the stablecoin from MakerDAO, which is one of the earliest DAOs or decentralized autonomous organizations in crypto. With a circulating supply of $6 billion, Dai sits as the 4th largest stablecoin.
Unlike the other stablecoins listed here, Dai is not backed by USD but rather uses cryptocurrency, specifically ETH, as collateral. The collateralization ratio is set at 150%, which means if you deposited $150 ETH you could borrow $100 Dai. When you repay the loan and accrued interest, your Dai is destroyed and your collateral is automatically returned to you.
Since Dai is backed by crypto, it’s definitely riskier to hold than some of the other stablecoins mentioned that are backed by cash. During times of extreme volatility, like in March 2020, the price of ETH dropped over 40% in a day, which resulted in large amounts of collateral getting liquidated. This caused the price of Dai to temporarily trade up to $1.11.
However, other than this black swan event Dai has held its $1 peg well. For those willing to shoulder these black swan risks, Dai is attractive because everything is fully decentralized. All of the ETH collateral is locked in a public address on the Ethereum blockchain for everyone to see. The smart contracts perform all of the functions that a central authority generally would.
What Stablecoins Should You Avoid?
- Newer stablecoins. Generally speaking, stablecoins that have just launched are riskier than those with a history. You want to choose stablecoins that have stood the test of time and come out of black swan events stronger
- Unproven, algorithmically-backed stablecoins. A great example of this is stablecoin IRON, which infamously crashed 100% after Mark Cuban talked about it.
- Low circulating supply / low volume stablecoins. Low market demand implies the market doesn’t yet trust the coin. Wait for confirmation first.