Stablecoin showdown: USDC vs. USDT

In less than a decade since their inception, stablecoins have reached a market cap of over $100 billion, driven by consistently strong demand. Now firmly embedded in the crypto market, they’ve become a go-to tool for traders looking to de-risk their portfolios. Among the many options available, two stand out as the most prominent: USD Coin (USDC) and Tether (USDT).

At first glance, the two digital assets seem identical, as both are designed to maintain parity with the U.S. dollar. However, a closer look reveals otherwise.

In this guide, we’ll explore the main differences between USDC versus USDT, what each token offers in a crypto portfolio, and how to choose between the two.

Understanding stablecoins: A simplified definition 

Stablecoins are designed to counter the volatility of crypto assets like Bitcoin (BTC), offering a stable onramp and offramp for web3 trading. Developers created these digital assets to maintain predictable value on peer-to-peer (P2P) blockchain networks.

Stablecoins hold a 1:1 value with a linked (or "pegged") asset, typically a fiat currency like the U.S. dollar or a commodity such as gold. While they don’t share the legal status of the assets they represent, stablecoins mirror their underlying value, providing stability and reliability within the decentralized digital ecosystem.

A tale of two stablecoins: What is USDC vs. USDT? 

Two of the most widely traded stablecoins, both USDC and USDT rely on a reserve-backed system to maintain the value of every token they issue (or "mint"). In this model, the stablecoin issuer holds assets equal to the total value of tokens in circulation. While this introduces a point of centralization – which is contrary to the decentralized ethos of cryptocurrency – it ensures each stablecoin maintains a 1:1 value relative to real-world assets held in reserve.

Beyond their price stability and reserve-backed structure, USDC and USDT are classified as "crypto tokens" because they operate on existing blockchains, including Ethereum (ETH), Solana (SOL), and Avalanche (AVAX). They utilize smart contracts to manage functionality and governance.

Key differences between USDC vs. USDT

Despite their similarities, USDC and USDT are not identical cryptocurrencies. Traders often evaluate factors such as each stablecoin’s history, market size, and liquidity to determine which they prefer to use.

Creator and history

One of the most notable differences between USDT and USDC lies in their origins. USDT, the older of the two, dates back to 2014 when developers Brock Pierce, Reeve Collins, and Craig Sellars introduced it under the name "Realcoin." Shortly after, it was rebranded as "Tether" and launched on the Bitcoin blockchain’s Omni Layer Protocol. Tether’s adoption grew significantly after expanding to the Ethereum blockchain, making it easier for traders to move in and out of crypto positions in decentralized finance (DeFi). Today, the Hong Kong-based company Tether Limited manages USDT’s reserves and distribution and operates closely with the centralized exchange (CEX) Bitfinex under parent company iFinex.

USDC, by contrast, has its roots in the U.S. financial ecosystem and maintains close ties to the American exchange Coinbase. Developed by Coinbase and the fintech company Circle as part of the Centre Consortium, USDC debuted on Ethereum in 2018. Since then, Coinbase and Circle have jointly managed USDC’s issuance while adhering to U.S. regulations to ensure transparency in their operations.

Transparency and regulatory compliance 

Despite Tether’s long-standing reputation, regulators continue to pressure the issuer for greater transparency about its reserves. Because Tether Limited is not subject to U.S. jurisdiction, it is not required to follow the same strict regulations that U.S.-based stablecoin companies like Circle must adhere to. This has led to high-profile accusations of compliance issues.

For example, in 2021, the New York Attorney General accused Tether Limited of "unlawfully" transferring "hundreds of millions of dollars" to cover losses at Bitfinex. While Tether did not admit guilt, it settled for $18.5 million. To address transparency concerns, Tether Limited now publishes reserve data on its official website to demonstrate its legitimacy.

In contrast, USDC has built a reputation for greater transparency, mainly due to its cooperation with U.S. regulators and its monthly audits published online. However, USDC has not been immune to controversy. In 2023, when Silicon Valley Bank (SVB) collapsed, Circle revealed that it had stored $3.3 billion of its reserves with the bank. Although the Federal Reserve intervened to cover SVB clients, the incident highlighted the centralization risks inherent in reserve-backed stablecoins like USDC.

Market capitalization and liquidity 

Despite ongoing questions about Tether’s reserves, USDT continues to dominate the stablecoin market by market capitalization. At the time of writing, Tether’s market cap exceeds $125 billion, dwarfing USDC's $36 billion. Even at its peak in 2022, Circle’s USDC only reached $55 billion. While market trends may evolve, Tether remains the most actively traded and liquid stablecoin worldwide.

Price fluctuations 

Tether Limited and Circle aim to keep their stablecoins pegged as closely as possible to $1, but significant deviations have occurred throughout crypto history. In the context of USDC versus USDT price stability, Tether faced what was arguably its greatest challenge when USDT dropped to a record low of $0.85 amid intense scrutiny over its reserves. Similarly, USDC experienced its most significant deviation when Circle revealed $3.3 billion of its reserves were held at the failed Silicon Valley Bank (SVB). Before federal intervention stabilized the situation, USDC briefly fell to $0.87 as fears of insolvency spread, but it eventually recovered. 

Under typical market conditions, some studies show that USDC tends to exhibit greater price stability, with an average deviation of 1.7 basis points compared to USDT’s 41.9 basis points. However, both stablecoins can slip from $1 during periods of extreme volatility, such as the 2020 COVID-19 crash. Despite these fluctuations, USDC and USDT have shown resilience and continue to scale their operations effectively.

How to choose between USDC and USDT?

USDC and USDT provide similar services to crypto traders, but each appeals to different preferences and priorities. Choosing between the two depends on factors like a trader’s goals, risk tolerance, and how each stablecoin’s unique features align with their strategy.

Liquidity

As the largest stablecoin by market cap, USDT offers higher liquidity due to its widespread adoption. It’s often the preferred choice for high-frequency traders and those using international platforms. USDT’s liquidity advantage translates to tighter bid-ask spreads and faster transaction times, even for large-volume trades. However, USDC’s growing presence, particularly in regulated and institutional markets, makes it an increasingly attractive option for traders seeking greater transparency and compliance.

Compatible blockchains

Both USDT and USDC are available on Ethereum and many Ethereum Virtual Machine (EVM) chains, but their availability varies across other networks. For instance, USDT is widely used on the low-fee TRON network, while USDC has discontinued support for this chain. Traders looking to use these stablecoins outside Ethereum should verify compatibility with their preferred blockchain.

Risk tolerance

Traders who prioritize transparency and regulatory compliance often prefer USDC over USDT. While USDC has a shorter track record, Circle conducts regular third-party audits and adheres to stringent U.S. regulatory standards. Tether also provides reserve data on its website but operates under less stringent regulations and has faced more controversies and legal challenges. 

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.