When we talk about the safety of stablecoins, we’re primarily referring to their ability to maintain their peg to the underlying asset, typically the US dollar. A stablecoin is considered safe if it consistently maintains its 1:1 ratio with the pegged asset. This means that one stablecoin token should be equivalent in value to one US dollar.

Not all stablecoins have a 1:1 peg to the US dollar. Some stablecoins are pegged to currencies like the euro or the British pound, while others are pegged to commodities like gold or oil. The choice of peg depends on the issuer’s goals and the target market for the stablecoin.

Since USDC (USD Coin) is one of the most prominent stablecoins with a 1:1 dollar peg, it is usually considered safe and reliable. But is that still the situation in 2024? Let’s find out. 

How are stablecoins rated in terms of safety?

When it comes to stablecoins, safety isn’t a one-size-fits-all concept. Several factors contribute to the overall risk profile of a particular stablecoin. 

One of the most important factors is transparency. Ideally, you want to know exactly what’s backing the stablecoin you’re considering. This means understanding the “reserve composition”. Are they holding actual US dollars or cash equivalents in reserve? These assets should be highly liquid, meaning they can be easily converted back to USD if needed. Additionally, regular audits and disclosures of reserve holdings are crucial for building trust. Just like you wouldn’t invest in a bank without knowing its financial health, you shouldn’t invest in a stablecoin without understanding its backing.

Regulation plays another key role in stablecoin safety. Stablecoins operating within a regulated framework, especially those subject to robust financial regulations, generally offer more security. This is because regulators can impose requirements on how reserves are held and managed, and they can conduct regular audits to ensure compliance.

Technology also matters. The underlying blockchain technology and smart contracts used by the stablecoin should be secure to prevent hacking and fraud. Additionally, the platform needs to be scalable to handle increased demand without experiencing system failures.

Let’s not forget the issuer themselves. A strong track record and a good reputation in the industry are good indicators of their commitment to safety and security. Finally, the size of the stablecoin matters too. Larger market capitalization, meaning the total value of all outstanding coins, suggests a broader base of investors and potentially greater liquidity, which can contribute to overall stability.

USDC in 2024: How stable has the stablecoin been

Throughout 2024, the cryptocurrency market has experienced significant fluctuations, with many digital assets experiencing substantial price swings.

Bitcoin, for instance, reached its all-time trading high of $73,750 (market cap of $1.44 trillion) on March 24, 2024. The halving event in April did not bring the surge that investors anticipated, but the news of 11 spot bitcoin ETFs being approved by the U.S. Securities and Exchange Commission caused a stir, and helped the cryptocurrency trade higher. However, it has now slipped about 19% and is currently trading at $57, 195 (at the time of writing). 

Another crowd favourite Ethereum also gained a boost from the USSEC approval; bounding up to a $3,800 trading price in March. This has been Ethereum’s best since its last rebound. As of September 5th, however, the Ether has slipped again to a price of $2,414. 

In contrast, USDC demonstrated remarkable stability, maintaining its peg to the US dollar with minimal deviations. This is not to say that the USDC has never deviated. While USDC is designed to maintain a strict 1:1 peg with the US dollar, it’s important to understand that market forces can occasionally cause minor fluctuations. Just like any asset, the supply and demand of USDC can influence its price.

When demand for USDC is high, the price might temporarily rise above $1.00. This is because buyers are willing to pay a premium to acquire the stablecoin. Conversely, when USDC is actively being sold, the price might dip below $1.00 as sellers seek to offload their holdings.

However, it’s crucial to note that these fluctuations are typically short-lived. USDC’s issuer, Circle, actively works to maintain the peg by adjusting the supply of USDC tokens as needed. As a result, any significant deviations from the $1.00 peg have been rare and temporary as the chart below shows.

USDC: Future forecast

Analysts suggest that USDC will continue to maintain its value close to its $1.00 peg in the coming years. While minor fluctuations are possible, the overall trend indicates a strong likelihood of USDC remaining a stable and reliable asset.

Here’s a breakdown of the forecast:

• Short-term: USDC is projected to trade slightly above its $1.00 peg in the near future, reaching $1.006 by the end of 2024.
• Mid-term: The positive outlook for USDC extends into 2025, with predictions suggesting a price of $1.008.
• Long-term: While specific predictions for 2040 are not available, the consistent trend suggests that USDC will continue to trade close to its $1.00 mark, solidifying its role as a dependable asset in the cryptocurrency market.

This forecast reflects confidence in USDC’s underlying stability, driven by factors such as its regulatory oversight, transparent reserve holdings, and strong investor confidence. If you are looking to trade in USDC or add stablecoins to your investments, do talk to us at [email protected] so we can help you make the right choice. 

Hope this helped!

Disclaimer: Virtual assets carry significant risks, including high volatility and potential loss of your entire investment. They are not backed by governmental protections, and recourse may be limited in case of loss. Always assess your risk tolerance, fully understand the risks, and seek independent financial advice if needed before investing.