One of investors’ main concerns going into cryptocurrencies is their volatility which causes their prices to spike upwards or downwards at any given time. This led some traders to opt for a more steady and secure choice: stablecoins. Several options are available in the market today but one of the best options for this digital currency is USDC because of its transparency and real-time transactions.
Keep on reading if you want to learn more about this stablecoin and find out the answer to the question, what is the purpose of USDC?
The basic concept of USDC
Launched in September 2018, USD Coin or USDC is a stablecoin pegged to the US dollar. Think of it as a tokenised version of USD as it’s fully backed by the fiat currency.
Although USDC is still a cryptocurrency, it maintains a steadier price because it uses reserve assets which in this case are cash and short-term U.S. government bonds. This is a far cry from leading tokens such as Bitcoin and Ethereum which are known to have unexpected price fluctuations.
USD Coin came into fruition after Coinbase partnered with the crypto platform Circle, which eventually formed the Centre consortium.
The newly formed Centre then developed the governing framework and advanced tech behind USDC while Coinbase and Circle launched the stablecoin’s first commercial issuance.
As for Circle itself, it was invented by American Entrepreneurs Jeremy Allaire and Sean Neville.
How does it work?
With investors flocking towards various stablecoins such as the USD Coin for its less volatile price, this begs the question, how does it maintain a 1:1 price with the US dollar? To answer this question, there are two different processes used in making this possible: minting and burning.
When buying USDC, the fiat currency you used for the purchase will be stored as one U.S. dollar before the new USDC will be minted.
Here’s a more detailed preview of how minting works:
- The buyer sends the amount of US Dollars he/she wants to be converted into USDC to the token issuer’s bank account.
- The issuer will then use a smart contract to create USDC and equal the amount of the sent US Dollars.
- After minting the USDC, they’ll be delivered to the buyer and their US Dollars are held in reserve.
On the other hand, selling USDC involves ‘burning’ the stablecoin in exchange for your fiat currency of choice. After this process, the amount of fiat that you exchanged your USDC for will be directly transferred back to your account.
What is the purpose of USDC?
Holding USDC is a smart move as it provides tons of uses aside from the benefits that they come with. These include:
Stabilise portfolio’s value
One of the main purposes of USDC is to act as a hedge that can help reduce and stabilise investors’ portfolio value.
Allow stable price-pegging
USDC’s stability allows it to represent valuable expenditures such as fund investments, equities and a net worth of a certain business. On top of that, USDC owners can use it to account for debts.
Shield local currencies from inflation
No local currency is safe from price inflation. For non-US citizens concerned about their fiats depreciating, they can hold USDC to protect their local currency from dropping in value.
Expose non-US citizens to US Dollars
Another purpose that benefits non-US citizens is that holding USDC can expose them to US dollars which they can eventually use to add to their cryptocurrency portfolios.
Allow sending money internationally with ease
Sending funds internationally is a hassle if you’re going to use the traditional means of money transfer services. With USDC, you can seamlessly transfer your assets without a bank account. Moreover, price volatility won’t be one of your worries because thanks to P2P transactions, all you have to pay is gas fees which aren’t that expensive.
Frequently asked questions about USDC
Even though USDC is one of the leading stablecoins by market capitalisation, investors still have questions regarding them that hinder them from investing in this digital currency. Some of the most common questions investors have about USDC include:
Which blockchains are USDC-compatible?
The great thing about USDC is that you won’t have to worry about its compatibility with different blockchains as it’s supported by some of the leading ones in the industry including:
Is it safe to invest in USDC?
Even though USDC’s a stablecoin, it can be considered a risky investment since it’s still a cryptocurrency. But compared to other tokens that aren’t stablecoins, they’re relatively safer because of their low volatility.
What are the pros and cons of USDC?
Investing in USDC comes with beneficial advantages but does it outweigh some of the cons it poses? See them for yourself down below:
- Little to no price volatility
- Can be used to shield funds against the effects of inflation
- Backed by US-regulated assets (bonds and cash).
- An abundant amount of liquidity.
- Can be subject to U.S. dollar price inflation
- Zero percent potential for price appreciation
- Some fees can be high
- Reserve assets aren’t fully disclosed.
Should you invest in USDC?
USDC is a reliable stablecoin for users sceptical about the volatility of other crypto tokens. It poses various advantages including its low price volatility and its ability to function as a hedge to protect funds against inflation.
Moreover, judging by the exciting innovations coming courtesy of decentralised applications, it’s comforting to know that this stablecoin is compatible with these services.
However, even though it’s immune to volatility, it can still be affected by US dollar price inflations. If you can look past that and price stabilisation is your main concern, then USDC is a great investment option for you.