A stablecoin is a cryptocurrency designed to keep a steady value, usually one US dollar per coin. While bitcoin and ether can swing wildly in a day, a stablecoin is meant to stay put. That makes it the plumbing of the crypto world, the place traders park money between trades and the main way dollars move around crypto exchanges.
How stablecoins keep their value
Most large stablecoins are backed by reserves. The company that issues them holds cash, short-term US government bonds and similar assets, and promises that each coin can be swapped back for one dollar. The two biggest examples are Tether’s USDT and Circle’s USDC. When demand for the coin rises, the issuer creates more and adds to its reserves. When people redeem, coins are destroyed and reserves fall.
Other designs exist. Some stablecoins are backed by other cryptocurrencies, held in larger amounts to provide a cushion. A third type, called algorithmic stablecoins, tried to hold their value using code and incentives rather than reserves. Several of those have failed spectacularly, most famously TerraUSD in 2022, which collapsed and wiped out billions of dollars.
Why they matter
Stablecoins let traders move in and out of crypto positions without returning to the traditional banking system, which can be slow and closed at weekends. They are also increasingly used for payments and transfers across borders.
Because the big issuers hold large amounts of short-term US Treasury bills, stablecoins have also become a meaningful buyer of US government debt. That links the crypto world to the bond market in a way few people expected a few years ago.
The risks
A stablecoin is only as good as its reserves and the issuer behind it. If people doubt that the reserves are really there, or that they can be sold quickly, they may rush to redeem, which can cause the coin to lose its peg, trading below one dollar. That is very similar to a run on a bank, and it shows why the quality and transparency of reserves matter so much. Our guide to currency pegs explains why fixed values can break under pressure.
Regulation is another factor. Governments in the US, UK and Europe have been bringing in rules for stablecoin issuers covering reserves, audits and redemption rights. Those rules can make the coins safer, but they can also change who is allowed to issue them.
Why it is relevant now
Crypto markets have been under pressure, with bitcoin briefly falling below $80,000 overnight on tensions between the US and Iran. In stressful moments, money tends to move from volatile coins into stablecoins, so their supply can be a useful gauge of mood in crypto. Our Morning Market Brief has the wider picture.
The bottom line
Stablecoins are cryptocurrencies built to hold a steady value, usually against the dollar. They are essential to how crypto markets work, but they are not risk-free, so always consider who issues a coin and what really backs it.
If you want to find out how you handle decisions like this, and where your own trading could improve, the free Samuel & Co Trading Trader Assessment is a sensible next step.
