Understanding Stablecoins: What’s the Difference Between USDT and USDC?
The complex world of stablecoins explained. Plus, find out which fiat-backed coin is the best for investment
The market of cryptocurrency is notoriously volatile. And if you’ve been in the crypto space for more than six months or so, then I’m sure you’ve experienced the “crypto blues” — the feeling that your portfolio could suddenly go up by 50% or plummet at any moment without warning.
The wild ride of cryptocurrencies can cause a lot of headaches for investors who want to invest long term — but still want some stability — as well as those just getting into the crypto space. But what if there was a way to invest without risking too much?
Enter stablecoins!
With a multi-billion-dollar market cap, stablecoins present investors with an alternative option to mitigate risks when investing in cryptocurrencies. This is because, unlike Bitcoin or other cryptocurrencies, their prices do not fluctuate.
Tether’s USDT and Coinbase’s USDC have consolidated their positions as the leading stablecoins, firmly entrenching themselves in nearly every major cryptocurrency exchange, wallet, and application. Combined, they have a market value of about 78%, accounting for over $102 billion in supply today.
But what’s the difference between Tether and USDC— and which fiat-backed stablecoin should you use?
In this article, we weigh in on the pros and cons of each, showing you their uniqueness to help you decide which one is right for your investment strategy. But first, let’s understand the basics surrounding stablecoins.
What Exactly Is a Stablecoin?
Background information
Stablecoins refer to cryptocurrencies where the price is pegged to another stable asset — usually fiat currency like the US dollar. However, the stablecoin itself isn’t directly tied to the stable asset; instead, one unit of stablecoin is usually equivalent to $1, so it can be seamlessly traded for 1 USD on cryptocurrency exchanges without losing value.
As a result, their prices remain relatively the same, unlike most other cryptocurrencies such as Bitcoin.
The first widely circulated stablecoin, Tether (USDT), was launched on top of the Bitcoin blockchain in 2014 by co-founders Brock Pierce and Craig Sellars as Realcoin. Soon after it took off, other stablecoins emerged. Today, over 40 stablecoins are circulating the market.
Although stablecoins have been in the market since 2014, their market supply quietly surged last year. In January 2021, the estimated market cap was around $30 billion, and it only took five months for that value to triple. Now, the market value of stablecoins is over 130 billion US dollars.
While the reason for this sudden spike remains unclear, experts speculate that it is a result of a growing worldwide interest in cryptocurrencies.
How Do Stablecoins Work?
Unlike other cryptocurrencies, stablecoins are not mined because their values remain stable throughout the cryptocurrency’s lifetime. They can only be created when someone buys an unstable cryptocurrency with a more stable one, which acts as collateral for the stablecoin.
For example, to create one USDC coin, someone needs to deposit $1 onto a cryptocurrency exchange that supports USDC trading. That person then receives $1 worth of USDC in return. Since each stablecoin is pegged to another asset or currency, its price should remain relatively constant unless there is another event that affects the market value of both assets.
Most stablecoins are designed to maintain one-to-one parity with their pegged asset; however, some can maintain a two-to-one ratio.
Stability Above All — or What Are the Benefits of Stablecoins?
The adoption of stablecoins meant fast transaction times, low fees and transparency, and most importantly, price stability that cryptocurrencies don’t provide. Let’s take a look at what this means to users.
Benefits for investors: Stablecoins offer stability and convenience
- Investors can use stablecoins to protect their assets from price volatility. When appropriately used, stablecoins don’t leave you with a pile of money that isn’t worth what it once was. This is because they are always stable since another stable asset backs them.
- Suppose the stablecoin issuer finds themselves in financial trouble. In that case, the investor can convert stablecoins into stable assets in a process called “redemption.” Here, redemption means exchanging stablecoins for US dollars.
- Stablecoins can also provide greater liquidity for cryptocurrency investors. Exchanging stablecoins for other cryptocurrencies (on exchanges with stablecoin pairs) means you can easily swap stable coins like USDC for Bitcoin or Ethereum (ETH).
- Converting stablecoins to fiat currency, either in person or online, allows for seamless use of stablecoins in the real world. A stablecoin that’s stable against the US dollar can be accepted anywhere the US currency is accepted.
Benefits for merchants: Stablecoins make accepting cryptocurrency easier and more stable
- Merchants can accept stablecoins via cryptocurrency wallets that support stablecoins, or convert stablecoins to the currency they need in order to pay bills.
- Stablecoins are also ideal when selling digital content because there’s no risk of chargeback fraud.
- If merchants want to use stablecoins in brick & mortar stores, they can easily convert their coins to fiat currency, for use in point-of-sale terminals.
Benefits for stablecoin users: Stablecoins are stable, convenient, and easy to use
- You can store stablecoins on cryptocurrency wallets that support stablecoins, or with stablecoin debit cards. Storing your stablecoins on third-party services isn’t recommended because stablecoins are stable assets that users should be able to control. If your stablecoins aren’t in your possession, then they can’t be used as a stable currency.
- A stablecoin is only as useful as it is convenient. As such, they make spending cryptocurrency easier by offering a 1:1 exchange rate with the US dollar. If you spend stablecoins, merchants will treat them like US dollars.
- You can also trade stablecoins on exchanges with stablecoin pairs. This means that stablecoins are liquid enough to be sold at any time for other cryptocurrencies.
- Stablecoins can also be used to transfer funds (in-person and online) with transaction fees far lower than the fees associated with using credit cards and payment services like PayPal.
With the above information in mind, let’s now look at the two largest stablecoins in the market today: Tether USDT and USDC.
Tether (USDT)
A brief history
Tether, ticker symbol USDT, was the first widely circulated stablecoin issued by Hong Kong-based Tether Limited. The idea to create it was first conceived in 2012, but it was officially launched on Bitfinex Exchange in 2014.
The USD-based stablecoin was designed to be pegged one-to-one with the US dollar, helping investors manage risks in an otherwise extremely volatile crypto market.
USDT is by far the most popular and valuable stablecoin, boasting a market capitalization of around $69 billion as of October 27, 2021. And with an average monthly trading volume of $2.3 trillion — USDT is the world’s most liquid cryptocurrency.
Governance issues and concerns raised
Tether has been in the ear of controversy for years now, with many skeptics claiming Tether doesn’t have the billions they claim they do to back Tether (USDT) tokens.
Tether’s representatives claim that their company holds a 2 billion USD reserve backing all tether tokens in circulation. However, this has never been proved by an independent audit or other trusted sources, which brings Tether under suspicion of being yet another controversial cryptocurrency project.
The most controversial Tether event happened back in November 2017 when Tether (USDT) tokens were used to artificially inflate Bitcoin’s price. Tethers were used to buy up Bitcoin, and Tether Holdings did this in order to convince traders that Bitcoin was worth more than it actually was.
These accusations, however, are yet to be proved, and there is no evidence that Tether’s USDT was involved in any manipulations.
As far as proving their Tether (USDT) tokens are backed by actual dollar deposits, the stablecoin issuer has been very reluctant on this matter.
Past audits have been called into question — and while the company has been very open about its willingness to conduct third-party audits, it’s yet to hire independent auditors for this purpose.
Does it really matter if Tether isn’t fully backed?
What does all of this mean for investors? Well, here’s the thing: Tether is a stablecoin — and it’s supposed to be worth $1 per token.
Even if we assume that all of Tether’s tokens are not fully backed, it doesn’t really change the value proposition of US dollars being held in reserve.
Sure, each USDT token is now riskier than before, but it would only mean that the company has less money per token on hand — not that its tokens will suddenly stop being used as a medium of exchange or store of value. In the light of this argument, it shouldn’t matter much for investors whether Tether isn’t fully backed.
Still, at least 58 percent of the stablecoin market consider USDT as trustworthy.
Summary of Tether
Tether is a popular choice among traders looking to take advantage of price changes by swiftly moving between crypto and fiat currencies. However, its reputation among the cryptocurrency community is justifiably controversial due to the several reasons mentioned above. This might have a significant impact on the value of this token.
So if you’re considering investing in Tether tokens or exchanging them for other cryptocurrencies, keep up with news and updates from Tether’s representatives.
In fact, you might even find it a good idea to buy some other tokens in addition to USDT since Tether has been known to be correlated with bitcoin prices (although this correlation is not as strong as that between BTC and ALT).
All in all, you should do your own research and take all the news into account before deciding on your investments.
What Is the USDC Stablecoin?
Background information
USDC — or USD Coin, is a token issued by Circle which has no central authority or bank backing it. It was launched on September 24th, 2018, and it follows the ERC-20 standard for tokens on the Ethereum blockchain.
The token is built using a smart contract platform — thanks to CENTRE’s open-source fiat stablecoin framework — enabling instant conversion between fiat currency and USDC. To users, this also means fewer steps in transferring funds.
With a market cap of around $32 billion, USDC is currently tradable on several exchanges, including Poloniex, Coinbase, KuCoin, and Binance.
As of October 2021, the coin holds a 24% market share of all stable coins in circulation.
How is stability guaranteed?
USDC is stable because it’s backed by the US dollar — where for every one USDC in existence there is 1 USD. But more importantly, Circle has already figured out how to make its stablecoin business transparent and accountable.
Backed by Circle’s USD reserves, the USDC token is subjected to rigorous inspections on a regular basis to guarantee that it remains a genuine dollar. With that, investors can rest assured that USDC will always be worth $1 regardless of the trading forces in the crypto market.
Moreover, USDC has several anti-money laundering features which are key to helping it meet state and federal laws.
This makes it more trustworthy than Tether or TrueUSD since Circle will be subject to the anti-fraud provisions of the Bank Secrecy Act and other AML laws, as well as regular public reporting and oversight.
Accordingly, it may be treated more like fiat by the financial system, which will make it useful as a stable store of value and medium of exchange.
What are the use cases for USDC?
The fact that USDC provides a stable fiat currency means it has multiple benefits to individuals and businesses alike. Let’s explore some of the use cases of USDC:
- Anticipating expenditure in fiat currencies denominated in crypto assets – Using USDC, companies can make better forecast expenditures and spending needs while maintaining the benefits of stablecoins as stable fiat currencies.
- Crypto investment hedging – With USDC, investors can rest assured that stablecoins will maintain stable values even during market crashes and bearish periods.
- Cryptocurrency payments – Payments made with stablecoins are stable from the moment they’re sent. They provide a safe and stable way for cryptocurrency holders to spend their digital assets.
- Crypto trading pairs – If traders see a price trend that they want to capitalize on, stablecoins like USDC allow them to trade knowing that the stablecoin’s value will hold its value even if market prices fluctuate.
The above point is especially relevant during periods of high volatility.
Additionally, since USDC is less volatile, transactions between cryptocurrency exchanges are made smoother because exchanges do not have to constantly convert currencies between each other. This is also the case when using USDC with Dapps (decentralized applications).
Summary of USD Coin
USDC attempts to bring stability and trustworthiness to the cryptocurrency ecosystem. What separates it from other cryptocurrencies, such as Tether (USDT), is its willingness to adhere to certain financial laws and regulations in order to promote a more trustworthy stablecoin.
It aims to provide a fast and low-cost way for users to move money globally through the Ethereum blockchain. Despite this, USDC, as it stands now, is not ready for widespread adoption.
This is because some key features are still under development — as the coin is yet to fully accomplish its intended goal of stability in the cryptocurrency world.
USDT or USDC: Which One Should You Use?
The biggest difference between Tether (USDT) and USDC comes down to trust — if you want your money to be safe, then it’s better to use USDC.
I’ll admit: both Tether and USDC are very useful stablecoins.
USDT is especially adopted by businesses and investors who are looking for an easier way to cheaply trade in US dollars but using Tether’s USDT. However, it has been surrounded by governance and trust issues.
It has had a patchy past, and while it’s likely to be at least mostly backed by USD and other assets, Tether has been the subject of much speculation about its solvency.
If you’re interested in using Tether, there are some steps you should take before doing so. For instance, checking their website periodically for transparency reports or reading up more on its developments.
Nonetheless, Tether is very liquid and has a greater trading volume, allowing for more transfers between crypto-assets and the stablecoin.
Why Do We Recommend USDC?
USDC is considered a more transparent and regulated approach to stablecoins than Tether, as it provides full transparency on the US dollar reserves backing every token issued.
It stays pegged at a 1:1 ratio to the USD, and with no price variance, it’s slowly becoming the go-to coin to invest in and make payments.
Additionally, USDC is a popular choice for traders owing to the fact that it can provide liquidity through conversion from crypto to fiat or cash out. This makes it easier for retailers to take on board.
Summary
So, should you use Tether or USDC? While it’s clear which one we recommend, it’s important to evaluate your specific needs and investment goals.
Ultimately, the decision will come down to two key things: The kind of investor you are — and what you are looking to gain (investing needs).
Use USDT to trade, albeit do not leave your money in USDT for a long time. But if your goal is to store a USD-pegged cryptocurrency for the long term, then USD Coin is your best bet.
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