There's been a lot of buzz about stablecoins recently, but many investors may not realize just how big they've become. The total size of the stablecoin industry is now about $250 billion, and U.S. Treasury Secretary Scott Bessent thinks the total size of the industry will be $2 trillion within just a few years.
As new stablecoin research from The Motley Fool makes clear, a handful of top names currently dominate the industry. These are the stablecoins that could have the biggest impact on the traditional financial system, so these are the names you need to know. Let's take a closer look.
Tether and USDC
Tether (USDT -0.02%) is at the top of the stablecoin heap, with a $164 billion market cap. It's the original stablecoin, dating all the way back to 2014. Next up is USDC (USDC 0.00%), with a $64 billion market cap. USDC launched in 2018, and has become the primary stablecoin for crypto exchange Coinbase Global (COIN -2.17%).
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Together, these two stablecoins account for a whopping 90% of the entire stablecoin industry. If there are only two stablecoin names to wrap your brain around, it's Tether and Circle (CRCL -2.01%), which is the issuer of the USDC stablecoin. Both back their stablecoins with a mix of cash and cash equivalents.
That's where things get interesting, because these cash equivalents can include Treasury debt, such as T-bills. Now you can see why Bessent is so enthusiastic about stablecoins. As they have grown in size, stablecoin issuers have become important buyers of U.S. government debt.
Tether, for example, made headlines back in May when it surpassed $120 billion in Treasury holdings. By way of comparison, that's more than Germany ($111 billion) holds!
Other top stablecoins
Rounding out the top five are Dai (DAI -0.02%), with a $5.4 billion market cap; Ethena USDe (USDE -0.05%), with a $4 billion market cap; and World Liberty Financial USD1 (USD1 -0.31%), with a $2.2 billion market cap. Together, they represent a combined 5% of the stablecoin market.
You might recognize the name World Liberty Financial -- it's the crypto venture affiliated with the Trump family. So, in many ways, World Liberty Financial USD1 is the official Trump stablecoin.
That's why there was a brief moment this summer when it looked like the new Genius Act (which regulates stablecoins) wouldn't actually pass through Congress. Lawmakers from both sides of the political aisle were understandably concerned about the prospect of a sitting U.S. president having an interest in a dollar-pegged stablecoin.
Some stablecoins are more equal than others
In theory, these stablecoins are exactly alike. They are all pegged 1:1 to the U.S. dollar, and all of them can be viewed as digital dollars.
At any point in time, you should always be able to exchange one stablecoin for one U.S. dollar. Hence, the word "stable" in stablecoin. They always (in theory) trade for $1.
However, some stablecoins are more equal than others. One key number to watch is daily trading volume. As Motley Fool research shows, Tether is the clear leader here, with more than $100 billion in Tether moving every day. That's equal to the annual gross domestic product of some countries. By way of comparison, daily trading volume in USDC is only $13 billion.
Another key factor is collateral. In other words, how are the big stablecoin issuers choosing to back their stablecoins? In order to maintain a 1:1 peg with the dollar, they must have enough cash (or cash equivalents) to maintain that peg. Roughly speaking, if the market cap of Tether is $164 billion, that means Tether has at least $164 billion in cash (or cash equivalents) in reserve. This is what maintains the peg.
Before passage of the Genius Act, companies had a lot of wiggle room on how to maintain the peg. Some chose to create so-called algorithmic stablecoins, which were backed not by cash, but by a bunch of financial derivatives and smart contracts. Guess what happened to these algorithmic stablecoins during the crypto market crash of 2022? The biggest of them, Terra USD, lost its peg and collapsed, wiping out $45 billion in value
Others chose to back their stablecoins with cryptocurrency, not cash. In theory, that crypto could be converted into cash if needed. But, again, that's theory. In a market meltdown, that crypto will be worth much less -- or nothing. So investors must always understand what's being used to back a stablecoin.
Another point of differentiation is where the stablecoin issuer is based. From my perspective, the best stablecoin issuers are based right here in the U.S.
Circle, for example, is based in the U.S. But Tether is not. It's domiciled in the Caribbean, and that has always been a point of contention with government regulators. A lot of crypto shenanigans have happened in the Caribbean, including the collapse of the FTX cryptocurrency exchange.
Will the top five remain the top five?
The passage of the new Genius Act will likely open the door for many more stablecoin issuers, including nonbanks. Tech companies could enter the fray, creating their own stablecoins. Retail giants could also enter the fray because stablecoins represent a possible way to reduce credit card transaction fees.
As a result, it will be interesting to see if the top stablecoins are able to maintain their current positions during the next 12 months. Tether and USDC are almost certain to hold on to their top positions, but there's a lot of room for innovation and disruption in the 10% of the stablecoin market that they currently do not control.
