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Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
1. You could lose all the money you invest
2. You should not expect to be protected if something goes wrong
3. You may not be able to sell your investment when you want to
4. Cryptoasset investments can be complex
5. Don't put all your eggs in one basket
If you are interested in learning more about how to protect yourself, visit the FCA's website here.
For further information about cryptoassets, visit the FCA's website here.
Stablecoins provide a way to bridge the gap between fiat currencies (such as pounds sterling) and cryptocurrencies. They’re designed to provide stability in the infamously volatile cryptocurrency market as the prices of most are “pegged” to something valuable like the US dollar or gold. However, they still come with risks. Here’s what you need to know.
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Visit coinbase.com or review our stablecoin white paper for more information on USDC.
A stablecoin is a type of cryptocurrency whose value is pegged to something like the US dollar or gold. What it is pegged to can vary, but the idea is that by linking the value of the digital asset to something else the price will be more stable than the price of other types of crypto.
Typically, the issuer of a stablecoin will set up a “reserve” where it securely stores the asset which is acting as collateral. For example, if the stablecoin is backed by US dollars, the stablecoin issuer will have $1 million in reserve to support 1 million units of the stablecoin.
It’s important to understand that there are different types of stablecoins. Each type is backed by a different type of asset:
You can buy a stablecoin like USDC on a cryptocurrency exchange like Coinbase.
Usually, you expect to pay a transaction fee when buying or selling cryptocurrencies with an exchange. However, Coinbase does not charge commission fees when UK customers buy or sell USDC1.
USDC is one of the major stablecoins on the market. It is pegged to the US dollar on a 1:1 basis, meaning every unit of the stablecoin in circulation is backed by $1 or asset with equivalent fair value, which is held in accounts with US regulated financial institutions.
There are several ways to use a stablecoin. Here are some of the most popular:
One of the risks of a stablecoin is that it can “depeg” from its collateral value.
How this occurs depends on how the stablecoin is backed. A sudden depegging is usually caused by the following issues:
Asset-backed stablecoins will lose their peg if the issuing entity doesn’t have enough reserves to back the number of stablecoins in circulation. However, this will only happen if markets are aware of the mismatch.
Algorithmic stablecoins can depeg if the market outperforms the algorithm or crashes too quickly. The algorithm is designed to secure the stablecoin’s currency peg to supply and demand. However, it’s not guaranteed – significant market crashes can still cause the currency to lose its peg.
The idea behind stablecoins is to help reduce some of the volatility seen in other cryptocurrencies. A widely held stablecoin could be a key stepping stone to mass crypto adoption. However, that goal is a little way off just now.
If you’re interested in stablecoins, it’s important to understand how the coin is backed and what risks are associated with it. Cryptocurrency is unregulated in the UK, so there’s no consumer protection. Even with stablecoins, the value can rise or fall, so it’s important not to invest what you can’t afford to lose, and to do your own research before buying your first stablecoin.
(1) This feature may not be available to all regions. No commission fees attributed to Coinbase will be charged until further notice. However, spread, and processing fees charged by third party processors, will continue to apply.
(2) Upon purchase of USDC, you will be automatically opted in to rewards. If you’d like to opt out or learn more about rewards, you can check out Coinbase's USDC rewards FAQs. The rewards rate is subject to change and can vary by region. Customers will be able to see the latest applicable rates directly within their accounts.
*Cryptocurrencies aren't regulated in the UK and there's no protection from the Financial Ombudsman or the Financial Services Compensation Scheme. Your capital is at risk. Capital gains tax on profits may apply.
Cryptocurrencies are speculative and investing in them involves significant risks - they're highly volatile, vulnerable to hacking and sensitive to secondary activity. The value of investments can fall as well as rise and you may get back less than you invested. Past performance is no guarantee of future results. This content shouldn't be interpreted as a recommendation to invest. Before you invest, you should get advice and decide whether the potential return outweighs the risks. Finder, or the author, may have holdings in the cryptocurrencies discussed.
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