Is USDC a good investment?

The top-level answer? Yes, as long as you like investing in dollars and receiving yields in dollars.

So, at its heart, USDC is simply a digital dollar. Its website claims: “USDC is the world’s fastest-growing, fully regulated dollar digital stablecoin”. It was launched in 2018 by the “Centre Consortium” with the support of two key institutions: the Coinbase exchange, and Circle Internet Financial.

The US has been talking about its own digital dollar for some time but keeps arguing with itself about whether a proper digital dollar would accidentally make banks worthless (this is apparently considered “a bad thing”). USDC’s main competitor so far has been USDT (“Tether”), which has had a chequered history, to put it mildly.

Anyway, USDC is a “stablecoin”: USDC’s own definition is:

“A stablecoin is a blockchain-powered digital currency that combines the benefits of open, borderless cryptocurrency with the price stability of traditional fiat currencies.”

Now, in the crypto space, there are a lot of stablecoins, pegged to various real-world assets: the US dollar, the euro, the pound, gold, silver, and even a digital yuan (this is a “CBDC” – a Central Bank Digital Currency, which is officially backed by China). They come in all shapes and sizes, promising that your investment is safe, but stablecoin collapse has so far been the biggest crypto story of 2022, particularly algorithmic stablecoins (coins that work on logic, not financial backing, like UST) and under-collateralised stablecoins (that don’t have enough assets or have assets that aren’t good enough). A bad stablecoin can easily lose its peg to the dollar and collapse, or suffer the stablecoin equivalent of a bank run when everyone redeems their coins.

So, what makes USDC useful? What makes it different to other stablecoins? How does it improve on the dollar?

USDC brings a safe US dollar equivalent to quite a few of the more reputable blockchains.

USDC is available on many blockchains, not just the main DeFi staple of Ethereum, including Algorand, Solana, Tron and Stellar.

Having a digital dollar on a blockchain allows the world of “real” money to be painlessly represented and provides a benchmark for the value of other tokens.

It allows easy access/exit to companies who want to get involved in digital assets. It allows lending and borrowing in USD without leaving the cryptocurrency space.

It also allows payments and settlements to be made more flexibly and across borders.

Plus, it gives developers of all kinds the ability to build USDC into their financial offerings, vastly increasing the ecosystem’s size and value. They even have an API (“application programming interface”) to make integration easy. If Ethereum’s 2.0 upgrade succeeds, you’re going to see an explosion in new financial apps.

Why is USDC a good investment?

Well, at its heart, you’re investing in dollars, which of course is the world’s reserve currency. The feature that makes USDC better than the real dollar is that yields in the digital space can be better than traditional finance for investors who park (“stake)” their coins.

The idea behind USDC is that each one is backed by a real dollar or equivalent, and each coin is redeemable for a real dollar on demand. If this promise ever broke, the coin would collapse.

This is why Circle take their assets seriously, their website promises:

“USDC is fully backed by cash and short-dated U.S. government obligations so that it is always redeemable 1:1 for U.S. dollars. Each month, we publish attestation reports by Grant Thornton regarding the reserve balances backing USDC. Circle is a licensed money transmitter in 46 U.S. states, plus Washington, D.C. and Puerto Rico.”

Risks

One of the major risks that applies to crypto is that the coin is under-backed or structurally weak. USDC avoids this risk with transparency and substantial backing.

Some of the other risks that apply to USDC are pretty much the same as other parts of crypto: wallets or exchanges you might store it in can get hacked, for instance. Infrastructural problems or bugs might impact your ability to move or interact with your funds.

There’s also a risk that the interest rates currently enjoyed for USDC deposits might simply change as it becomes easier to borrow.

And of course, any company you entrust your digital dollars to has to be trustworthy and reliable: which means it’s on the plucky investor to check out that website (especially the small links) and check out those founders (what did they do before this?).

Of course, there’s also the possibility that the US dollar itself will collapse, but if that happens we’ve all got bigger problems than what to do with stablecoins, like how to stop the gloating of the Bitcoin HODLers who now have $1m-worth of Bitcoin.