As its name suggests, USD Coin (USDC) is a cryptocurrency whose value is tied to the U.S. dollar. USD Coin is a stablecoin, and as such one USDC should always be equal in value to one dollar.
USD Coin is the currently the second-largest stablecoin, with a current market capitalization of $73 billion. USD Coin and Tether (USDT) together account for 80% of the capitalization of the global stablecoin market.
Understanding USD Coin
Launched in 2018 by Centre, a consortium founded by Circle and Coinbase, USD Coin was created as a regulated stablecoin that runs on blockchain technology.
Stablecoins are a type of cryptocurrency whose value is pegged to another asset, such as a fiat currency, a commodity or even another crypto coin. USD Coin aims to maintain a one-to-one peg with the U.S. dollar.
Stablecoins like USDC are used differently than cryptos like Bitcoin (BTC) or Ethereum (ETH), which fluctuate in price. The sole purpose of this crypto is to provide a stable store of value, rather than provide an asset that, theoretically, appreciates in value over time.
The year-to-date return on Bitcoin is -35% as of this writing, for example. Meanwhile, the value of USDC has remained almost completely flat year to date. The lowest trading price that USDC has fallen to within the last 52 weeks is $0.995, a slight dip below its dollar peg.
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How Does USD Coin Work?
USDC is backed by real assets, and is sometimes referred to as a fiat-collateralized stablecoin. As the name suggests, fiat-collateralized currencies are backed by a sovereign currency, such as the U.S. dollar or the British pound.
To maintain USDC’s stable value equal to $1, USDC is backed by cash and short-term U.S. government bonds as collateral. For every USDC token in circulation, $1 is held in collateral.
When crypto investors buy USD Coin, they expect one USDC to always be equal in value to one dollar. So why own USDC? The most common use case is to purchase USDC, store it on an exchange or in a crypto wallet, and then use it to fund purchases of other cryptocurrencies.
USDC Offers Transparency
Steve Bumbera, chief operating officer of Many Worlds Token, says USDC is typically looked at as a safer stablecoin because of the degree of transparency surrounding its collateral reserves.
“Centre works with auditors and government regulation with a transparent and clear description of the reserves available to back the peg to the U.S. dollar,” Bumbera says.
You can even view monthly reports of these reserve balances, including how much USDC is in circulation and its equivalent value in U.S. dollars.
Auditing firm Grant Thornton releases USDC’s attestations. As of May 2022, Circle announced that the company would provide weekly attestation reports. They help build trust in USDC, as they disclose the precise amount of actual funds backing the stablecoin.
When you buy 1 USDC, a new USDC is minted. And when you choose to sell 1 USDC for fiat currency, the coin is “burned” when you make the transaction.
Similar to the U.S. dollar, USDC is also divisible. You can hold down to 0.000001 USDC, although Coinbase sets a withdrawal limit of 0.001 USDC. You also can’t withdraw more than 15,000,000 USDC at one time.
“Digital asset market participants can interact with or acquire USDC via trading USDC denominated pairs on an exchange, or directly interacting with USDC’s issuer,” says Marco Manoppo, research director at Digital Asset Research.
USDC provides liquidity to crypto markets and is available as an asset on several major blockchain networks, such as Ethereum, Algorand (ALGO), Solana (SOL) and TRON (TRX), to name a few. To be super specific, USDC is also an ERC-20 utility token, which is standard for creating smart contracts on the Ethereum network.
Pros and Cons of USD Coin
USD Coin’s main advantage is that it enables people to buy and sell other cryptocurrencies without having to move fiat currency in and out of exchanges.
USDC can be transferred 24/7 and is faster to send than traditional currencies, with settlements occurring in seconds. Transaction costs are low cost, making it cost- and time-efficient to use.
In the words of Jeremy Allaire, founder and CEO of Circle, “What makes USDC such a great product is that it’s easy to create and redeem, with seamless integration with the existing global banking system. As a result, customers are able to use it as a very efficient pipe between legacy electronic dollars and digital currency dollars.”
“It also enables the transfer of capital across different geographical jurisdictions much faster, especially compared to traditional wire transfers,” Manoppo says.
There are still downsides to using USDC. For one, there is no price appreciation. Users should also be aware of the regulatory landscape surrounding digital currencies and stablecoins. Crypto experts also say that government regulations against these digital assets could have a crippling effect on the future of these assets.
USD Coin vs. Bitcoin
What separates USD Coin from cryptos like Bitcoin is that it is fully collateralized.
“Unlike USDC, Bitcoin is not backed by other assets,” Manoppo says. “BTC’s value narrative revolves around its scarcity, similar to gold.”
While USDC’s value is based on the value of the U.S. dollar, Bitcoin’s value is derived from its limited supply. There will only ever be 21 million bitcoins in circulation. If you’re keeping score, currently, there are roughly 19 million Bitcoins in the marketplace. Crypto believers say this scarcity will enable the coin’s value to continue rising over time.
But there are challenges to having an asset’s value defined only by people’s perceptions, as demonstrated by Bitcoin’s volatile nature.
Meanwhile, USDC’s value has stayed relatively stable over its life, although there may be some short-term volatility during extreme market periods, Manoppo says.
The flip side of the investment narrative is that having a digital asset pegged to a fiat currency like the U.S. dollar doesn’t make a great investment for appreciation.
Is USD Coin a Good Investment?
Purchasing USD Coin won’t generate any returns for investors, as it is intended to be a stablecoin. So the advantage of this crypto is more about its usage, as there isn’t an expected price appreciation with this coin.
Investing in USDC would be like stashing U.S. dollars under your mattress, and your investment would never be worth more than the equivalent cash.
That said, there are some avenues to profit off of USDC. You can make passive income with USDC by lending it to other crypto investors. A few lending programs will pay you interest for lending your USDC. But of course, no investment is risk-free, and you are taking a little bit of risk on borrowers in gaining a yield on USDC.
Again, the overall goal of USDC is to help businesses and individuals transfer currency in a faster and more economical way by eliminating the need for traditional intermediaries like banks and providing a stable crypto.
