It’s the Summer of Stablecoins. 3 Things Investors Need to Know.

In July, the President signed the Genius (Guiding and Establishing National Innovation for U.S. Stablecoins) Act into law. This created guidelines, such as requiring a 1-to-1 reserve ratio and regular audits, to protect consumers and support the growth of this nascent technology. It’s fair to say that stablecoins have arrived, especially since the regulatory backdrop has become much more favorable.

Given how much attention has been given, this has undoubtedly been the summer of stablecoins. Here are three things investors need to know about this new development in the financial services sector.

Image source: Getty Images.

1. Use cases and adoption

It’s important to understand the purpose of stablecoins. Their prices are designed to be pegged to another asset. Some stablecoins are backed by other cryptocurrencies, commodities, and even algorithms. However, the most prominent type is fiat-backed stablecoins, with issuers commonly using U.S. Treasuries to support them.

The best way to understand how stablecoins work is to think about a casino. People come in and exchange their dollars for chips. Once they are done playing, the remaining chips are then exchanged back into dollars. During that time, the value of the casino chips doesn’t change.

Stablecoins have the advantages of cryptocurrencies, namely speed, low fees, and availability. But they also have the advantage of being backed by a widely accepted financial instrument, like dollars or Treasuries.

Adoption is growing. Research from consultancy McKinsey and Company estimates that volumes for stablecoins backed by U.S. dollars is now more than $27 trillion on an annual basis.

The top use cases of stablecoins are clear. They can facilitate crypto trading. Users can send stablecoins across the border as remittances. And in countries that experience currency issues, like hyperinflation, citizens might want to store some of their wealth in stablecoins.

2. Largest industry players

The leading fiat-backed stablecoins, USDT and USDC, are issued by Tether and Circle Internet Group, respectively. The combined market cap of these tokens is $236 billion. But it’s worth pointing out that Tether is much larger.

Stablecoins have rapidly become a notable force in the financial services industry. A report from The Motley Fool shows that stablecoin reserves at Tether and Circle now rival that of well-known brokerages. However, they remain significantly below deposits held by major banks.

Companies outside financial services are showing interest. Amazon and Walmart are exploring issuing their own stablecoins. It makes sense why, as these could be used as a payment method that would let these businesses avoid paying massive sums to process card transactions. Customer adoption would be a different question, though.

3. How to invest

Unlike stocks, which many investors look to for capital appreciation, stablecoins are meant to maintain their value. Therefore, there is no growth potential. But investors can generate passive income by staking them on exchanges.

Investors looking to find a direct way to gain exposure to stablecoins can invest in Circle directly. Investing in brokerages like Coinbase and Robinhood Markets could also provide indirect exposure.

There could be huge potential. Ark Invest, the asset manager headed by Cathie Wood, believes the total supply of stablecoins will reach $1.4 trillion by 2030. That would be up from about $200 billion at the end of last year.

As is the case with any investment, there are risks. Despite new regulations, issuers still might not have adequate reserves. Stablecoins could lose their peg to fiat currencies due to market volatility or liquidity concerns. There could also be a run, as large numbers of consumers rush to sell their stablecoins for whatever reason.

This year has been a seminal period for stablecoins. Investors interested in the space now understand what purpose stablecoins serve, the biggest players in the market, and the investment implications.