Today, you'll learn all about the USD coin, what it is, and even how it works!
At its core, the USD Coin is a digital currency that's fully backed by the US dollar.
In this sense, it’s known as a tokenized US dollar and THAT means the value of one USD Coin is always equal to... 1 US dollar!
This class of crypto coins, which are pegged to the US dollar, are called stablecoins.
You have maybe heard about them - they’re certainly a large part of crypto markets and news.
But really, what are they anyway?
What are Stablecoins?
Well, stablecoins are cryptocurrencies that usually have a value attached to real-world assets like the US dollar or gold.
Their purpose is to create cryptocurrencies whose values can stay constant.
Compare this to crypto coins like Bitcoin, which can experience large price fluctuations - making their price increase or decrease irregularly.
Do you want to wake up tomorrow and find your stored wealth slashed in value?
Me neither!
Before the creation of stablecoins, the only real way to store wealth stably was to transfer crypto back into fiat - which was hardly ideal!
As such, stablecoins give crypto currency holders a way to consistently maintain their wealth over long periods of time.
It might be no surprise then that a stablecoin called USD Coin has a one to one price peg, right?
But with these basic concepts explored, let’s go back in time for a minute…
How was USD Coin formed in the first place?
In the beginning, USD Coin was created by Circle, a big digital payments platform, in 2018.
Circle partnered with Coinbase, a cryptocurrency exchange platform, forming a joint venture known as the Centre Consortium.
Their intentions were to develop the technology USD Coin uses and oversee its operations.
Shortly after, Coinbase listed USD coin on its trading platform, and before long, other crypto exchanges like Binance did the same.
Today, USD Coin is the second biggest stablecoin and is available on all major crypto exchanges.
Now, before moving on further, it’s important note that the USD coin is different from the US dollar even though they have the same value.
After all, USD Coin is a cryptocurrency, while the US dollar is a fiat currency…
So, What is USD Coin used for?
A primary use for USDC is to stabilize your portfolio value.
If you have bitcoin or any other crypto coin in your investing portfolio, owning USD Coin during periods of massive price fluctuations could help you stabilize your portfolio and reduce losses.
A second major use USD Coin has is for making cross-border transactions.
Using traditional banks, sending money using a wire transfer can be expensive.
You can avoid these fees by simply using USD Coin instead - which offers much lower fees for transfers, regardless of the sending and receiving locations.
A third option, particularly if you’re a non-US resident wishing to invest in US dollars, is to buy USD Coin as an alternative.
As the value of both assets is equal to each other, it’s a way to protect the value of your money and hedge against possible inflation.
Alternatively, if you have an organization, you could even raise money from investors and donors around the world in the form of digital currencies like USD Coin, too.
It might be a bit of work to set it up, but the reduction in time spent getting everything together later would make it truly worthwhile.
Lastly, if you’re an active crypto trader, you’ll find USD Coin very useful for carrying out transactions on various blockchains.
This is because it can act as a bridge between various cryptocurrencies, allowing easy swaps between them.
With crypto markets’ rapid volatility, many investors and traders look to stablecoins like USD Coin to act as a safe haven for their money.
So it’s no surprise then that USD Coin is the 6th largest cryptocurrency by market cap, with over 2.7 billion dollars in trading volume each day.
But how does it keep up with US dollars anyway?
How Does USDC Maintain its Peg?
To understand how USD Coin maintains its peg, here’s a simple illustration.
Imagine that you're in a situation where your friend needs to borrow some money from you, but they want to guarantee that they'll pay you back.
To provide a sense of security and trust, they give you a valuable item, like a piece of jewelry or an electronic gadget, as collateral.
It means that if they are unable to repay the borrowed money within the agreed timeframe, you have the right to keep or sell the valuable item to recover the money you lent.
Well, this idea of collateral is similar to how USD Coin works.
Every USD Coin token is backed by an equivalent amount of actual US dollars, which are held in reserve.
It works the same as you holding onto your friend's jewelry until they return the money.
When you buy USD Coin, the exchange holds on to US dollars, so when you're ready to swap your USD coin for US dollars, you can do so smoothly.
It’s in this way that USD Coin's value is able to maintain its peg to the US dollar.
So it sounds good on paper but how well does it work in reality?
Can you really trust USD Coin?
The truth is - stablecoins do sometimes deviate from their intended values, although usually under extreme circumstances.
A prime example was when Terra USD - a stablecoin issued by a now defunct payment platform - crashed in 2022.
The coin plummeted from maintaining its peg of 1 Terra USD to 1 US dollar, all the way down to trading at a mere cent!
Although stablecoins use a variety of different technologies to stabilize themselves, it doesn't rule out the possibility of another crash happening in the future.
One thing which might cause a stablecoin to crash and lose its parity with the dollar include inadequate reserves - as in, not having the collatoral to back itself up.
Fortunately, USD Coin has some pretty robust measures which act against this.
For every USD Coin in circulation, there's a corresponding reserve of US dollars held by regulated financial institutions.
This one-to-one backing creates a secure foundation, making USD Coin far less susceptible to de-pegging for this reason.
Another potential problem is a lack of regulatory compliance, whereby regulations are ignored, potentially causing big problems for holders down the line.
USD Coin mitigates this by strictly adhering to financial guidelines set by regulators, ensuring it is a legal, financial asset.
Nobody wants legal complications when it comes to stores of wealth, so it’s easy to understand why USD Coin founders are paying so much attention to correct regulation.
Sound good so far?
How can you actually get USD coin anyway?
Well, USD coin is supported by some of the biggest crypto exchanges in the world now.
You can buy USD Coin from Coinbase, Binance, Kraken, Bybit, and many other exchanges too.
If you want to make your first purchase, the first step is to fund your fiat wallet on the exchange of choice, typically using a bank transfer or your credit card.
Next, simply swap your fiat money for USD Coin - usually for a very low fee.
After that - congratulations!
Your USD Coin will be deposited, ready in your crypto wallet.
You now have the option to convert it back into fiat currency, or in many cases swap it for other cryptocurrencies altogether.
The possibilities are endless!
Conclusion
In this article, you learned all about USD Coin, which has been going strong since its launch in 2018.
It’s a reknowned stablecoin that is backed by the US dollar, ensuring that each one always equals 1 US dollar.
You can use USD Coin to stabilize your investment portfolios, process fast cross-border transactions, make online payments, and raise funds for your startup or non-profit.
I showed you why USD coin is also trusted by many because of its ability to maintain a stable peg with the US dollar.
This is made possible by every USDC token is backed by an equivalent amount of actual US dollars held in reserve.
You also learned that while stablecoins can depeg, USDC's founders have implemented strong measures to prevent this.
These include having sufficient reserves of US dollars, regulatory compliance, regular audits for transparency, and the support of leading crypto companies.
As the crypto industry evolves, stablecoins like USD Coin will continue to play a vital function in crypto payments and investments globally.
Check out getting some for yourself if you’re interested!
