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Some stablecoins (a type of cryptocurrency) try to tie their value to another currency. For example, the TerraUSD stablecoin was pegged to the U.S. dollar, at least it was before it collapsed last week. It has been reported that TerraUSD investors lost tens of billions of dollars in the crash.

My question is why would anyone invest in something that's supposed to be tied to a currency like the U.S. dollar? Wouldn't that be akin to keeping a pile of physical U.S. dollar bills under your mattress?

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Stablecoins exist solely to get money to a crypto exchange. Period. Almost all trading volume you see in bitcoin charts, for the BTC-USD pair, isn't USD, it's actually a stablecoin. Because all over the planet, almost all of the money being used to buy bitcoin et al. is channeled through a stablecoin.

There is no reason to invest in a stablecoin. All you get in return for your dollar minus the fee you pay is a unit in a not safe or regulated money market fund. And guess what, your dollar isn't sitting in a mattress somewhere. It's being used to lend money to someone. Optimistically the loans are to governments (treasury bills) but clearly sometimes, the loans are less safe. Tether paid a settlement to the NY attorney general for making junk rated corporate loans with your safe - backed - dollars.

Apart from the obvious structural problems of a stablecoin. Once you have your coins, if you don't just buy crypro, you're actually sending them to some ridiculous lending pool where you might be supporting margin lines on exchanges or some other very high risk endeavor where the interest rate clearly indicates high risk but somehow everyone pretends that "smart contract" means lending magically isn't risky and money is always paid back.

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  • What advantage does channeling money through a stablecoin offer? People were buying bitcoin for years before stablecoins were invented.
    – 7529
    May 24, 2022 at 22:54
  • @7529 I haven't looked in a while, but the main reason a while ago was to avoid fees as the exchanges would charge fees if you traded to USD but not to other cryptos, so if you were wanting to swing-trade BTC a proper stablecoin would be the best place to park money between trades.
    – Hart CO
    May 25, 2022 at 3:01
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    @7529 a lot of exchanges aren’t attached to traditional banking for customers, so with many exchanges you can ONLY fund your account with crypto. So you buy a stablecoin with your dollars (or euros) then send that crypto to an exchange, OR send it back somewhere else to turn your crypto back to fiat. But the stablecoin IS the trading pair, not USD as is frequently quoted in the media.
    – quid
    May 25, 2022 at 3:07
  • As an example of what @quid is talking about, see Poloniex, which was extremely popular in 2015–2017 and offered a vast array of crypto–crypto trading pairs, but did not accept any fiat.
    – Jivan Pal
    May 30, 2022 at 13:46
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People didn't invest in TerraUSD. People invested in various investment systems that used TerraUSD as a currency and/or as a blockchain.

The most popular one was a protocol called Anchor which would just give you 20% annual return, supposedly paid out from venture capital investments as an incentive to join the protocol. In the long run the protocol would be used to make loans whose interest would be the return.

Another class of TerraUSD-related "investment" was liquidity pools, a.k.a. Automated Market Makers, with approx 5-10% annual return and a different risk profile. These exist for most cryptocurrencies and are considered quite safe other than the currency risk (which is a large risk for non-stable coins).

Another was the Mirror protocol, designed to mimic stock market prices, although I'm not sure how popular that was.

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    I have to confess that I spent an unseemly amount of time gawking at the Twitter and Reddit communities for TerraUSD during the collapse. There were certainly a lot of posts of anguish from folks who said things like "I put my life savings in TerraUSD because I was told it was a stable coin!" followed by folks advising them to "Keep on HODLing, it will come back." These were separate from the complaints of the Luna holders. Clearly some people were "investing" in TerraUSD. May 24, 2022 at 16:14
  • @CharlesE.Grant Reality: They put their life savings in one of the above, or something else, or maybe they were planning to. There's no reason to exchange your life savings to TerraUSD if you aren't going to use one of these services. May 24, 2022 at 16:16
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    I think you overestimate the investing savvy of these folks. The story a lot of them told was "All my friends told me to do crypto to get rich, but I was worried about it, so they told me to invest in TerraUSD because it was 'stable'". I agree it makes no sense as an investment, but a significant part of the TerraUSD eco-system seems to regard low-knowledge users simply as a source of exit liquidity. May 24, 2022 at 16:22
  • @CharlesE.Grant I can agree with that now that I've seen people calling for them to "just delete all the Luna" without saying whose Luna should be deleted Jun 14, 2022 at 11:37
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In a vacuum it could function as a currency investment. So if I wanted to invest in indian rupees: I could buy a rupee stablecoin.

As opposed to dealing with forex brokers and amassing physical paper.

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