Should You (or Anyone) Buy Tron (TRX)?

Tron's price has only fallen by 8% since the start of the year, and at points it has increased where the rest of the market was dropping.

Tron (TRX) attracted headlines earlier this year as one of the few cryptocurrencies that increased in price when much of the market was falling. Indeed, Tron's price has decreased by just 8% since Jan. 1, while market leader Bitcoin (BTC) has fallen by over 50%. It's also one of only a handful of cryptocurrencies that have held onto their position as a top 50 crypto for several years. However, Tron didn't reach new highs in last year's crypto frenzy and has also attracted its share of critics.

Tron basics

Tron is a smart contract crypto with a mission to "decentralize the web." It's focused on the entertainment industry, as shown by the Tron Foundation's acquisition of file sharing platform BitTorrent in 2018. However, there are also several decentralized finance products on Tron's ecosystem.

Here's a quick overview of Tron:

• What it is: The governance token for the Tron network
• Management team: Founded by Justin Sun, who remained as CEO of the Tron Foundation until last year
• Date launched: Initial coin offering in 2017 and TRON testnet launch in 2018 
• Market cap: $6.4 billion (CoinMarketCap, July 2022)
• Availability: Some, but by no means all major U.S. cryptocurrency exchanges.

Should you buy?

Tron is one of many cryptocurrencies that's been touted as an alternative to Ethereum (ETH). On the plus side, it has a relatively long track record. More established cryptocurrencies are often better positioned to survive long term than those that only recently arrived on the scene. According to DeFi Llama, Tron is also currently the biggest crypto in terms of the amount of money deposited on its blockchain. However, a large proportion of the cash comes from its USDD stablecoin, which is one of several reasons to be cautious about Tron.

The USDD algorithmic stablecoin

At first glance, TRX's strong performance in a falling market this year is a positive. The challenge is that the main driver for its price gains was the launch of an algorithmic stablecoin. These are somewhat of a holy grail for the crypto industry, as everybody wants to launch a fully decentralized stablecoin. But -- as we saw with Terra's UST earlier this year -- some have failed spectacularly. 

Unlike fiat-backed stablecoins that should have money in the bank to support the tokens they issue, algorithmic stablecoins use computer code to maintain their price. The attraction is that they are decentralized, so they don't rely on a third party. Unfortunately, the risk is that things could spiral out of control if they lose their pegs and investors could lose their money.

Tron launched USDD, its own algorithmic stablecoin in May. Like Terra's UST, investors can earn high APYs by depositing USDD. At time of writing, the TRON DAO Reserve offered over 33% APY on USDD deposits. USDD lost its peg at the start of June, causing the Tron DAO to add more to its reserves to maintain the price. Tron founder Justin Sun told Bloomberg that the plan is to overcollateralize USDD to avoid meeting the same fate as Terra. Even so, following Terra's collapse, there's a lot of skepticism about these projects.

Controversy around Tron founder Justin Sun

When evaluating any cryptocurrency project, it's good to look at the people behind it. Justin Sun is a well-known figure in the cryptocurrency industry, and he was CEO of the Tron Foundation until late last year when he stepped down to become Grenada's ambassador to the World Trade Organization. 

A deeper dive into Sun's background raises some questions. Among other things, there are accusations of insider trading and market manipulation. A detailed investigative piece by The Verge depicts Sun as a risk taker who plays fast and loose with the rules. It said the FBI and SEC are investigating Sun, though neither organization confirmed this. Sun denied the allegations, labeling them "fabricated storytelling."

Bottom line

The collapse of Terra showed us that even established cryptos can fail and algorithmic stablecoins don't always work. The fact that a lot of Tron's recent price growth was based on the launch of an algorithmic stablecoin that has already lost its peg once is reason enough to tread carefully. Throw in the various accusations online about its leadership, and the potential that authorities are investigating insider trading allegations, and Tron becomes an extremely risky proposition.

Cryptocurrencies are already high-risk investments, but some cryptos are riskier than others. For sure, Tron does have some positives. Nevertheless, with over 18,000 available cryptos, there are plenty of interesting projects that don't raise as many red flags as Tron.