In recent discourse about cryptocurrency investments, the question arises: is a leading stablecoin like USD Coin a better investment than Bitcoin, the world’s foremost cryptocurrency? Over the past decade, Bitcoin has experienced an astronomical price increase of approximately 34,260%, largely due to its growing acceptance by institutional investors, corporations, and even governments. Factors such as its capped supply, the systematic halving of mining rewards every four years, and the recent approval of exchange-traded funds (ETFs) have bolstered its position as a long-term hedge against inflation, akin to gold and other commodities.
However, 2023 has painted a less favorable picture for Bitcoin, which saw only an 11% rise in its price while the S&P 500 outperformed with a 16% increase. Two primary reasons have contributed to this underperformance. Firstly, persistently high Treasury yields have diverted many investors away from speculative assets like cryptocurrencies. Secondly, a trend of profit-taking emerged as broader markets reached historically elevated valuations.
As Bitcoin’s long-term outlook remains optimistic, its short-term growth appears restrained, prompting investors to consider alternatives, such as USD Coin.
When distinguishing between USD Coin and Bitcoin, it’s essential to note their foundational differences. Bitcoin operates on a proof-of-work (PoW) model that requires powerful computers for mining, where miners solve cryptographic puzzles to earn rewards. With about 19.9 million of the maximum 21 million Bitcoins already mined, its scarcity is a key value driver. However, the volatile nature of Bitcoin’s price inhibits its use for everyday transactions, leading many holders to retain their assets as opposed to spending them.
Conversely, stablecoins like USD Coin are pegged to traditional fiat currencies, with USD Coin specifically tied to the U.S. dollar at a 1-to-1 ratio. On the surface, launching a cryptocurrency bound to a fiat currency may seem illogical, as it fails to function as a hedge against inflation. Moreover, it is expected to lag behind the impressive long-term returns of the S&P 500.
Nonetheless, stablecoins such as USD Coin offer significant advantages over traditional U.S. dollars. They can be maintained without a bank account and facilitate faster, cheaper cross-border transactions. Additionally, stablecoins can serve as a means for individuals in countries facing currency devaluation to preserve savings while also being used to derive interest through lending on centralized and decentralized finance (DeFi) platforms, often at yields surpassing those of standard savings accounts.
USD Coin, currently boasting a market capitalization of $76 billion, ranks as the second most valuable stablecoin after Tether, valued at $183 billion. Despite its smaller size, USD Coin has critical advantages over Tether. Launched by Circle in 2018, it is completely backed by U.S. dollars and short-term U.S. Treasuries, with reserves managed by recognized financial institutions like BlackRock and BNY Mellon. The stablecoin also undergoes monthly attestations from independent auditors to validate the value of its reserves.
In comparison, Tether, established by iFinex in 2014, relies on a diverse mix of cash, commercial paper, and other assets for its backing. Its lack of transparency—only summary reports on holdings—raises concerns, making it perceived as a riskier stablecoin. While Tether enjoys wider support across various blockchains, USD Coin’s conservative approach offers a more stable investment option.
Despite its clear advantages, viewing USD Coin as a direct substitute for Bitcoin would be misguided. While it may serve as a useful tool for diversifying cash holdings and potentially earning higher yields compared to traditional savings avenues, USD Coin is unlikely to match Bitcoin’s performance or the returns of the S&P 500 over the long term. For those comfortable with the inherent volatility of cryptocurrencies, investing in Bitcoin remains a more strategic choice than sticking with stabilized assets like USD Coin.
