Better Stablecoin Buy: Tether vs. USDC

Key Points

• Tether is significantly larger than USDC in terms of market cap and boasts overall greater liquidity.

• USDC is emerging as a new payment option for U.S.-based consumers, thanks to a partnership with Coinbase.

• USDC provides greater transparency and a higher level of regulatory scrutiny than Tether.

• 10 stocks we like better than USDC ›

Just two stablecoins -- Tether (CRYPTO: USDT) and USDC (CRYPTO: USDC) -- account for a whopping 90% of the value of the $250 billion stablecoin market. So, for the majority of investors, the question of which stablecoin to pick really comes down to Tether vs. USDC.

Since stablecoins are pegged 1-to-1 to the U.S. dollar and are designed to always trade for $1, the choice will be based on factors other than price. Here are three factors to keep in mind.

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Market liquidity

This is one area where Tether really shines. As the world's largest stablecoin, Tether has unparalleled liquidity. And the easiest way to see that is in daily trading volume. According to the latest stablecoin research from The Motley Fool, more than $100 billion in Tether changes hands every 24 hours. No other stablecoin even comes close. USDC, for example, sees daily transaction volume of only $13 billion.

Image source: Getty Images.

If you're an active crypto trader, moving into and out of positions rapidly, this liquidity matters. And that's especially the case if you are trading on smaller cryptocurrency exchanges, or trading smaller-market-cap cryptocurrencies. There's simply less price slippage.

However, if you're a long-term, buy-and-hold investor, this aspect of stablecoins may not matter at all. Over the long haul, the price of the stablecoin will always be $1, so the various fluctuations in price that occur consistently throughout the day will not matter at all. Still, the nod here goes to Tether.

Score: Tether 1, USDC 0.

Utility

A second major factor in choosing the best stablecoin is utility. In other words, how many use cases exist for the stablecoin, and how easy is it to use?

Right now, the one use case that investors are talking about is transactions. And that's where the USDC stablecoin has the upper hand for investors based in the U.S. There are simply more places where you can spend your USDC. That's due in part to the fact that the issuer of USDC, Circle Internet Group (NYSE: CRCL), is based in the U.S. Tether is based in El Salvador and has historically focused much more on emerging markets.

USDC has lined up an important partner in Coinbase Global (NASDAQ: COIN) in helping to make USDC-based transactions a reality. Not to get too deep into the weeds here, but USDC is an ERC-20 token built on the Ethereum (CRYPTO: ETH) blockchain, and Coinbase has a proprietary blockchain called Base that runs on top of Ethereum. That makes it easier to create new payment mechanisms for USDC that run on Ethereum payment rails.

In June, for example, Coinbase unveiled Coinbase Payments for e-commerce. In theory, websites will now be able to integrate USDC payment solutions into their backend. When customers check out, they can choose to pay with USDC rather than, say, by using a credit card. In doing so, merchants can save 2%-3% on credit card processing fees (presumably passing some of those savings on in the form of lower prices) and also get access to near-instantaneous transaction settlement. No more "transaction pending" messages or waiting three to five business days for funds to move.

It remains to be seen, of course, how many partners Coinbase will be able to sign up for USDC payments. One early win, however, was Shopify (NASDAQ: SHOP). And more could be forthcoming, now that new stablecoin legislation has been enacted. So my pick here is USDC.

Score: Tether 1, USDC 1.

Transparency and regulatory clarity

For me, this is the deciding factor. Which stablecoin is more transparent about its cash reserves? Which stablecoin gets more scrutiny from U.S. regulators? And which stablecoin has done a better job during the past few years of showing its commitment to full transparency and disclosure?

The winner here is USDC, and it's not even close. Again, this goes back to the fact that Tether is not a U.S.-based entity. As a result, it is simply not subject to the same amount of scrutiny as New York-based Circle, which became a publicly traded corporation in June. There are now analysts and sophisticated Wall Street investors taking a very close look at every aspect of what goes on at Circle and USDC.

That's hugely important to me, because the stablecoin industry has seen some funny business during the past few years. In fact, Tether has had its share of run-ins with U.S. regulators and lawmakers over the status of its cash reserves. When investors choose a stablecoin, they need an ironclad guarantee that they can always exchange one stablecoin for $1, no questions asked. So the tiebreaker here goes to USDC.

Score: USDC 2, Tether 1.

At the end of the day, Tether and USDC are obviously very similar. Both trade for $1 and both enable investors to accomplish many of the same goals. But, based on the factors outlined above, my top stablecoin pick is USDC.

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Dominic Basulto has positions in Circle Internet Group, Ethereum, and USDC. The Motley Fool has positions in and recommends Ethereum and Shopify. The Motley Fool recommends Coinbase Global. The Motley Fool has a disclosure policy.