(Un)Stablecoins: A Risk-Averse Investor’s Guide to Safeguarding Your Crypto

On March 10, we witnessed an event that nearly pushed crypto to the brink of collapse. Silicon Valley Bank, founded in 1983 with over $200 billion in assets, went under after depositors scrambled to withdraw funds. This was a classic case of mismanagement and incompetence, but how does this affect the crypto industry? 

Circle, the company behind the second-largest stablecoin, had over $3 billion worth of USDC reserves in SVB, and this news caused the token to briefly lose its peg. At one point it was selling for $0.88 – 12% under its expected value. 

Before going into how you can keep your portfolio safe, it’s crucial to understand what stablecoins are, how they work, and what causes them to lose their peg.

What are Stablecoins and How do they work?

Stablecoins are tokens pegged to a real-world currency. For every USD-pegged token issued by Circle, Tether, or any other stablecoin provider, a real dollar is kept in its reserves. As of now, no stablecoin provider publishes audits of their reserves. Instead, these companies put out ‘Proof of Reserves’ statements, which are about as reliable as saying, “trust me bro.”

Banks infamously do not want to work with these stablecoin providers, so when three of the only banks partnered with crypto companies (SVB, Signature, and Silvergate) crashed, liquidity in crypto markets temporarily dried up. The blockchain community has since raised concerns about relying on centralized banking infrastructure to run its decentralized finance operations, but the most popular cryptocurrency by trading volume to date remains a tokenized form of the US dollar. 

But this isn’t the only form of stableecoin.

What are algorithmic stablecoins?

Instead of being backed by fiat money, these stablecoins are backed by other cryptocurrencies. 

Most algorithmic stablecoins fail. These aren’t reliable investments if you’re looking to keep your money in crypto without having to deal with the market’s wild swings. 

When the cryptocurrencies backing the stablecoin fall in value, the algorithmic stablecoin is supposed to adjust its reserve ratios to maintain price stability. All of these mechanisms are managed automatically by smart contracts. Unfortunately, these mechanisms fail more often than not.

Stablecoins are often hailed as the solution to crypto volatility – a way to keep your money in crypto without having to worry about all the wild price swings. But if stablecoins aren’t stable anymore, how do you keep your crypto-assets safe?

Don’t overlook DAI

DAI is a decentralized stablecoin that’s backed by cryptocurrencies like ETH and Wrapped Bitcoin. The difference between DAI and other algorithmic stablecoins is that it’s over-collateralized, meaning you have to deposit around $1.70 worth of ETH to mint 1 DAI. If the value of ETH falls, you either deposit more ETH, or risk being liquidated (i.e. the locked-up ETH is sold to ensure the protocol doesn’t lose money).

What some don’t realize is that this only applies to minting DAI. People mint DAI for a variety of reasons, but you can buy DAI directly from an exchange for exactly $1. DAI remained stable through the Luna/UST crash, and is the longest-running decentralized stablecoin to date, having launched nearly six years ago in 2017.

The problem is, nearly 50% of DAI’s collateral reserves are in USDC. If something were to happen to USDC (as it did on March 10), this stablecoin would technically be at risk. Luckily, the 12% drop in USDC’s peg wasn’t enough to topple this DeFi behemoth. However, if algorithmic stablecoins sound a tad too risky for you, there is another option.

Long-term stability, short-term risk

Another popular option is to move your assets into Bitcoin, which is widely considered a store of value, though it is far more volatile than any of the stablecoins we’ve mentioned here. If you’re looking for a long-term solution, and don’t mind bearing the short-term price swings, Bitcoin is probably your safest bet.

You could also swap into Monero, a privacy-focused digital asset that’s maintained its value at around $150 since last June. Though it’s not stable by any measure, XMR’s primary use-case is payments, meaning it doesn’t fluctuate as wildly as some other tokens out there. However, with the laws surrounding privacy coins being quite strict, you may run into trouble getting your hands on some.

Get out or get rekt

If the risk of holding crypto assets seems too high, you only have one option left: liquidate. Sell your tokens for fiat currency. Make sure to look into your local tax laws before doing this, because it can get pretty complicated. For instance, Germany doesn’t require you to pay capital gains taxes on crypto assets held for longer than a year, but if your assets are staked, you have to hold them for ten years to avoid paying taxes.

A lot of people who lost money during the UST crash would have killed for the opportunity to pay tax on their crypto if it meant getting back at least some of it. If risk is something you can’t handle, this is your only option.

Crypto is an incredibly risky market, and it’s important to remember this when organizing your portfolio. In an age where scams comprise a large portion of the digital asset market, make sure to verify everything a project claims before parting with your funds. 

Remember: not your keys, not your crypto. Make sure to store your assets safely in a cold storage wallet, and write down your seed phrase somewhere secure. The VCs have failed us (3 Arrows Capital), the exchanges have failed us (FTX), and now the stablecoins are failing us too. As a risk-averse investor, it’s time to get a grip or get rekt.

Your move!

Lead image generated with stable diffusion
Prompt: Illustrate a basket filled with stablecoins