USDC: From Dollars to Digital Gold!

Better known by its ticker USDC, USD Coin is an ERC-20 stablecoin pegged 1:1 with the US dollar.

Founded by Circle in 2018, USD Coin is a way to access United States dollars on the blockchain by converting it into $USDC, which is always equal to the US dollar.

Currently, USDC sits fourth by market capitalization, accounting for roughly 5% of the overall crypto market.

But before we discuss why this would be useful to crypto investors, first, we need to talk about what USDC is and explain the crypto jargon I just mentioned in the first few sentences.

An ERC-20 token is a token-creation blueprint for the Ethereum blockchain, and its purpose is to ensure all tokens released on the Ethereum network are compatible with their wallets, apps, and smart contracts.

This ERC-20 token is a “fungible token,” which means it is interchangeable with another token of its type and always be worth the exact same amount. Meaning 1 USDC will always be worth 1 USDC.

While this may sound complicated, a physical, real-world example would be a dollar. You can always change a $1 note for any other $1 note, and it will always be worth $1.

It is the opposite of the more famous “non-fungible token,” or NFT, which always changes somehow, ensuring that no two are exactly the same.

A stablecoin is a token paired with another asset, in USDC’s case, the US dollar. This means the price always matches the US dollar, 1:1.

To keep its $1 value, Circle backs every USDC token 1:1 with a real dollar, which it holds in a reserve stockpile of cash, bonds, and other cash equivalent assets, like commercial paper, treasury bills, etc.

When you buy USDC, you are essentially sending US dollars to Circle’s bank account, which then creates new USDC tokens of equal value for you to use on the blockchain.

The opposite is also true. If you sell your USDC, Circle destroys the digital equivalent and returns the cash they held in reserve, ensuring that USDC is always worth $1.

All of this happens automatically through smart contracts, which are just digital agreements that activate when pre-agreed requirements have been met. Thus, they happen instantaneously and without the need for human participation.

This way, if every investor decided to exit their position, there would be enough capital to do so, which ensures its worth of $1 as it can always be redeemed for $1.
Occasionally you will sell USDC “de-peg,” meaning it loses its 1:1 pairing with the US dollar.
This occurs when a large number of investors suddenly leave the marketplace. Consequently, it doesn’t stay perfectly at $1 due to the physical, real-world time it takes to sell or return the currencies held in reserve.

However, very rarely have we seen any of the major stablecoins drop below $0.99, and if they do, it quickly returns. When it doesn’t, you may have to reconsider your investment in that stablecoin; because if it’s not tied at $1, then it isn’t very stable.
But ok, now we understand that USDC is a type of digital currency used on the blockchain, which is designed to always be worth $1.

The next question is usually why? Why would anyone want this? Doesn’t it defeat the point of
investing in crypto?

Why invest in a stablecoin?

First, from a consumer perspective, spending in a currency format they are used to, such as in £ or $, is usually easier to understand than trying to work out how much 0.00084 BTC is worth.

Second, they provide an easy arbitrage opportunity.
If the price dips below $1, people buy to sell once parity with the dollar has been restored.
Alternatively, when the price goes above $1, people sell their holdings for a small profit and buy back when parity returns.

However, more importantly, stablecoins provide a level of security for crypto investors.
As such, it doesn’t defeat the purpose of investing in crypto. If anything, they offer a level of stability when
the market is volatile.

If you have been investing in Bitcoin for an extended period, you may have noticed a trend. Not that trends are guaranteed to repeat in the future, but historically, every Bitcoin halving eventually leads to a spike in consumer interest.

Those who notice this pattern but don’t want to cash out of their crypto holdings to cash, perhaps because they want to reinvest some of that back into their favorite cryptos once the prices fall, need a safe way to store their crypto gains in time between.

This is where stablecoins shine. If you feel the market will turn, stablecoins offer a safe haven during turmoil and massive drops in value for all other token types.

Additionally, they make payments much more stable and straightforward to understand if you want to settle payments on the blockchain or send remittances internationally.

For non-US residents, it also makes a good hedge against inflation of your local currency.

If we look at Turkey’s Lira in recent years, investing in a stablecoin wouldn’t be a bad idea for the average Turkish citizen until the local economy stabilizes.

Finally, USDC gets good rewards for staking pretty much everywhere you look. Staking is how proof-of-stake blockchains verify their transactions and will almost certainly have better interest rates than regular banks.

In short, USDC is a highly interoperable dollar equivalent on the blockchain. Anywhere that accepts Ethereum can accept USDC, making it ideal for purchases and payments on the blockchain and as safe storage during times of uncertainty.

Stablecoins are less risky

While most cryptocurrencies offer the thrill of a roller coaster ride, stablecoins are there when you need a moment to breathe before figuring out your next best move.
Without them, investing in cryptocurrencies would be much riskier and require a lot more active management of your portfolio.

For this reason, two of the top five cryptocurrencies by market capitalization are stablecoins, as
they are essential to a smoother blockchain experience.