Day 5: Stablecoins and altcoins

Bitcoin is one asset among thousands. Today: what stablecoins are for, and why most altcoins are riskier. About 5 minutes.

1. 1. Stablecoin

   A stablecoin is a token designed to hold a steady value, usually one US dollar. The largest, Tether (USDT) and USD Coin (USDC), are issued by companies that say they hold reserves such as cash and short-term US Treasury bills to back every token, and that let approved customers redeem tokens for dollars. Other designs include crypto-collateralised stablecoins such as DAI, which are backed by more crypto than they issue, and algorithmic stablecoins that rely on market incentives. The algorithmic TerraUSD (UST) lost its peg and collapsed in May 2022, wiping out tens of billions of dollars. Stablecoins are widely used for trading, moving money between exchanges and storing value on-chain. Their risks include the issuer's reserves and solvency, frozen addresses, regulation and temporary de-pegs during market stress.

   In India: In India, dollar stablecoins are taxed like any other VDA. Their rupee price moves with the USD/INR exchange rate, so even "stable" coins can produce taxable gains when the rupee weakens.

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2. 2. Tether (USDT)

   Tether (USDT) is the largest stablecoin by market capitalisation, designed to keep a value of one US dollar. It was launched in 2014 by the company now known as Tether Limited and is issued on many blockchains, including Ethereum, Tron and Solana. Tether says each USDT is backed by reserves held by the company, mostly short-term US Treasury bills, along with other assets including some gold and bitcoin, and it publishes quarterly attestation reports. It has been criticised for years over the transparency of those reserves. In 2021, the US Commodity Futures Trading Commission fined Tether $41 million over past claims that USDT was fully backed by US dollars at all times. USDT is the most traded asset in crypto and is the main quote currency on many exchanges. It is widely used for trading, cross-border payments and saving in dollars in countries with weak currencies. Like any centrally issued stablecoin, Tether can freeze USDT held by specific addresses.

   In India: USDT is a VDA in India, so selling or swapping it is taxable at 30% plus cess with 1% TDS. Buying USDT at a rupee premium on P2P markets and selling at a lower rate still counts as a VDA transaction for tax.

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3. 3. Altcoin

   "Altcoin" means any cryptocurrency other than Bitcoin. Early altcoins such as Litecoin (2011) were close variations of Bitcoin's code. Today the term covers thousands of assets, from large smart-contract platforms like Ethereum and Solana to small speculative tokens. Altcoins vary enormously in purpose, technology, decentralisation and risk. Some run independent blockchains with their own security, while others are tokens issued on another chain. Many are controlled by small teams or have concentrated token ownership. Historically, most altcoins have been more volatile than Bitcoin and many have lost almost all their value. Before buying, it is worth checking the coin's market cap and liquidity, who holds the supply, what its upcoming token unlocks are, and whether it solves a real problem.

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4. 4. Coin vs token

   In crypto, a "coin" is usually the native asset of its own blockchain, such as BTC on Bitcoin, ETH on Ethereum or SOL on Solana, and is used to pay transaction fees and secure the network. A "token" is an asset created by a smart contract on an existing blockchain. Examples include USDC and UNI, both issued as tokens on Ethereum and other chains. Token standards make tokens interchangeable across wallets and apps. On Ethereum, ERC-20 is the standard for fungible tokens and ERC-721 for NFTs. The same token can exist on several chains, sometimes through bridges, so always check the network before sending. In everyday use, people often say "coin" and "token" interchangeably. Creating a token costs very little, which is why thousands of new ones appear every day, many of them worthless.

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5. 5. Market capitalisation (market cap)

   Market capitalisation is the current price of a coin multiplied by its circulating supply. If a token trades at ₹100 and 10 million are in circulation, its market cap is ₹100 crore. Rankings of "top coins" are almost always sorted by market cap. Market cap is a quick way to compare the size of different assets, but it has limits. It does not mean that much money was invested or could be withdrawn. Selling even a small share of supply can move the price sharply if trading is thin. A token with a tiny circulating supply and a high price can show a large market cap that very little real trading supports. "Fully diluted valuation" (FDV) uses the maximum or total supply instead of circulating supply and shows what the market cap would be if every token were in circulation. A large gap between market cap and FDV means significant future dilution.

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General information, not financial advice.