🧘♂️Beginner’s Stablecoin Guide
Market Meditations | May 13, 2022
Usually, on Friday we would share technical analysis in the newsletter.
In light of recent events, we have decided to dedicate today’s newsletter to a stablecoin 101. We will share much-needed information on the major stablecoins. With particular attention to their security. The Terra events have revealed that more education is needed.
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- Everything You Need to Know About the Major Stablecoins
- Sam Bankman-Frees Robinhood
- NFTs Get the Cold Shoulder
⏰ Top Headlines
- Galaxy Digital Sees Quarter-to-Date Loss of $300M
- Terra Blockchain Resumes Following 9-Hour Halt
- Celsius pulled half a billion dollars out of Anchor Protocol amid Terra chaos
- Kava Network’s USDX tumbles to $0.65 as yet another stablecoin depegs
Stablecoins literally have one job: stability. As we see in the graphic below, the top five stablecoins by market cap currently account for over $160 billion. With that much money at stake, nothing can be taken for granted.
We use stablecoins for everything from hedging against volatility to blockchain interconnection. But with uncertainty in the markets, we’ve taken a deeper look into these popular assets. In the following sections, we explain how the main stablecoins operate and what the security and safety mechanisms are for each. Every coin is also grouped into its relevant category. For a breakdown of the categories refer to the following table:
Different Types of Stablecoins
#1 Tether (USDT)
- What is it: USDT is a fiat-backed stablecoin hosted on the Ethereum blockchain. According to Tether, each USDT is backed by the U.S. dollar at a 1:1 ratio.
- Risk assessment: In 2021, Tether was required to pay $41 million by the U.S. Commodity Futures Trading Commission resulting from allegations of making untrue statements about how its stablecoin was backed.
- Due Diligence: According to the last Independent Accountant Report, Tether’s reserves are made up of traditional currency to the tune of 83.74% held in cash & cash equivalents in addition to other short-term deposits & commercial paper. Scrutinising these publications would serve you well in responsible investment decisions.
There has been a lot of panic recently surrounding USDT’s deviation from its peg to $0.95 in the wake of the devastation on Terra. However, there are some key differences between the two.
- USDT has more severely deviated from its peg in the past and quickly corrected. In 2017, its peg was lost, dropping as low as $0.91 when approximately $31 million was stolen in a hack.
- Tether Chief Technology Officer Paolo Ardoino took to Twitter to reassure that USDT redemptions would always be honoured at $1, citing “$300m redeemed in the last 24 hours without a sweat drop.”
- The USDT price took about 8 hours yesterday to re-establish the $0.99 mark, and is trading at $0.999 according to CoinMarketCap at the time of writing.
#2 USD Coin (USDC)
- What is it: USD Coin is a fiat-backed stablecoin managed by Centre (a consortium co-founded by Coinbase and Circle). Like other stablecoins at the top of this list, it’s backed by fiat at a 1:1 ratio.
- Risk assessment: USDC is fully backed by short-term U.S. government obligations and cash to keep it perpetually redeemable at all times.
- Due Diligence: Attestation reports regularly to provide transparency for the coin’s backing. Do not take backing for granted! Spend the time reading them.
#3 Binance USD (BUSD)
- What is it: BUSD is issued by Binance in partnership with Paxos, and rounds out the top 3 stablecoins by market cap. It should come as no surprise that it’s also backed by fiat.
- Risk assessment: Paxos holds a number of dollars equal to the total supply of BUSD in FDIC-insured U.S. banks or backed by U.S. Treasuries.
- Due Diligence: Paxos also issues monthly attestation reports to provide transparency to users into the current breakdown of fiat backing.
#4 Dai (DAI)
- What is it: Dai is an Ethereum-based ERC-20 token indirectly pegged to the U.S. dollar created by MakerDAO.
- Risk assessment: DAI is decentralised, and not backed by a stable asset like the U.S. dollar, unlike the stablecoins above. Instead of being supported by an equivalent amount of currency off-chain, DAI tokens are propped up by overcollateralized debt denominated in ETH.
- Due Diligence: Since Dai is minted only after collateral has been provided, responsible research here begins with looking at smart contracts and audits. Reading Dai’s whitepaper is an absolute must.
#5 TerraUSD (UST)
- What is it: UST is an algorithmic stablecoin, using the value of Terra’s Luna token and proportionate minting/burning mechanisms to control the supply and value of UST.
- Risk assessment: As an algorithmic stablecoin, TerraUSD is not backed by any collateral, though recently Bitcoin and Avalanche (AVAX) were added as a safeguard should the mechanism fail. Unfortunately, this proved to be insufficient.
- Due Diligence: Early warning signs criticising its structure surrounded Terra’s meteoric rise in market cap. Even if whitepaper interpretation isn’t in one’s skillset, the research could have kept us all out of a sticky situation.
If looking to escape some volatility in this dangerous crypto market, stablecoins have traditionally been a no-brainer. However, without diligently researching these assets, investing in them would be brainless.
Take the time to understand a coin before buying in, nothing is guaranteed, but knowledge is always the safest bet.
? Sam Bankman-Frees Robinhood
Robinhood, like most assets, hasn’t had a good month. The investing app left a bad taste in many mouths last year when, in January, it froze trades for GameStop. But redemption may be on the table for the exchange populating most millennials’ cell phones.
- Robinhood’s (Ticker: HOOD) price has been almost cut in half from $15.91 on Mar 29 to a new low at $7.73 on May 11.
- Sam Bankman-Fried, founder and CEO of crypto exchange FTX, has acquired a 7.6% stake in the online brokerage app.
- According to a securities filing made with the SEC Thursday, a purchase totaling $648 million worth of shares averaging a price point of $11.52 per share was made by Bankman-Fried spanning a range from March to this week.
- The announcement offered some much-needed relief for Robinhood shareholders, as HOOD’s stock price pumped as much as over 30% during after-hours trading before retracing.
- Crypto has become a huge part of Robinhood’s supported assets since introducing Bitcoin and Ethereum in January of 2018.
Given SBF’s history of building a highly successful exchange in the cryptocurrency market, it may be a safe bet to assume this move will have implications for Robinhood’s crypto products in the future. As distasteful as it is, tragedy breeds opportunity, and not only for hedge fund managers and CEOs. Take a page out of the big players’ book and keep your nose to the grindstone. Times like these are when “luck” is made.
? NFTs Get the Cold Shoulder
The crypto market is reeling with grief, regret, and many other emotions this week. It’s safe to say sentiment is incredibly low after the attack on TERRA wiped billions of dollars out of crypto.
- The protocol failure had such a vast effect on market participants that their despair has spread like wildfire to every corner of the market, especially NFTs. According to data reported by the Block, liquidity in the NFT market is quickly drying up.
- The BAYC floor is down 25% to 88 ETH, the Bored Ape #8585 that sold for $2.7 million in October of 2021 recently sold for $247,000.
- The CryptoPunk floor is down 15% to 52.5 ETH, many crypto punks which were selling just a few months ago for over $1 million are selling for closer to $100K.
- The Okay Bears collection on Solana has seen a 19% drop in sales volume while the overall NFT market on SOL is down 21%.
On top of market capitulation and the attack on DeFi, the macro picture looks as dismal as ever. Some speculators think we may have reached a bottom, while others think we are going lower. One thing we can confirm about the market is the extreme fear reading of the Fear & Greed Index is ‘spot on.’
- Watch our How to Get Rich Trading Crypto Course if you struggled with today’s technical section.
- Read the following Technical Analysis guides for more insight:
Not financial or tax advice. The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision. See our important security disclaimers here.
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