Crypto portfolios: How much of a stablecoin allocation is too much?
Cryptocurrencies are well-known for being volatile assets, which means that experienced traders have plenty of opportunities in the space. Investors can expect to be taken on a wild ride if they plan on holding for a long time.
Stablecoins, a class of cryptocurrencies that offers investors price stability pegged to the value of fiat currencies, offer investors a safe haven when market turbulence hits but may represent missed opportunities over time.
Speaking to Cointelegraph, several experts have stated that retail investors should approach cryptocurrencies with a “pay yourself first” attitude and that an allocation of up to 5% in crypto should be relatively “safe” while allowing for “marginal return.”
Stablecoins are entirely different: No “marginal return” can be expected from simply holding an asset tied to the value of the United States dollar, although yields can reach double-digit annual percentage rates (APRs) using decentralized finance (DeFi) protocols. These protocols, however, lead to higher risk.
Not all stablecoins are created equal. The largest stablecoins on the market — USD Coin (USDC), Tether (USDT) and Binance USD (BUSD) — are backed 1:1 by cash or assets with similar value by centralized companies. This means that for every token in circulation, there’s a dollar in cash, cash equivalents or bonds in custody.
For example, other stablecoins like Dai (DAI) and TerraUSD (UST) rely on different mechanisms. DAI is crypto-collateralized and ensures it can maintain its peg by being overcollateralized. It includes economic mechanisms that incentivize supply and demand to drive its price to $1.
UST, on the other hand, is a non-collateralized algorithmic stablecoin. An underlying asset doesn’t back it, as it works
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