Stablecoins are crypto tokens designed to hold a steady value, usually by tracking a currency such as the US dollar or the euro, instead of swinging in price like Bitcoin. They let people move and hold "digital cash" on a blockchain, which is why traders, payment apps and savers all use them. Stable does not mean safe, though: the value depends on the reserves and the promises behind each token.
In brief
- A stablecoin is a crypto token that aims to keep a fixed value, most often one unit of a currency, and most of them track the US dollar.
- The main types are fiat-backed, crypto-backed and algorithmic, and they differ a lot in how well the peg is protected.
- They are mainly used as the cash side of crypto trading and for fast transfers, not as a way to make your money grow.
- The main risks are a loss of the peg, doubts about the reserves, a rush of redemptions and the platform that holds your tokens.
In this article · 11 min read
- What stablecoins are
- How stablecoins work, step by step
- The main types of stablecoins
- How big the market is
- What stablecoins are used for
- Advantages and limits
- Where stablecoins fit in your crypto plan
- How to use a stablecoin carefully, step by step
- Checklist before you hold a stablecoin
- Who it is for
- Key terms
- Frequently asked questions
- Sources
What stablecoins are
Central banks describe a stablecoin as a type of cryptocurrency designed to minimise fluctuations in value by linking it to one or several assets with a stable value, such as the dollar or the euro. The Bundesbank adds that most of them are tied to an official currency, mainly the US dollar and much less often the euro, while a few track assets such as gold.
In practice a stablecoin works like a receipt on a blockchain. Each token is meant to be worth one unit of the reference currency, a link known as the peg, and whoever issues it promises to hand that unit back when you return the token. Because the token lives on a blockchain, it can be sent at any hour, to anyone with a wallet, in minutes. That mix of a steady price and blockchain speed is what makes stablecoins useful.
How stablecoins work, step by step
The simplest design, a reserve-backed stablecoin, follows these steps:
- You deposit money. You send currency to the issuer, directly or through an exchange.
- The issuer creates tokens. It issues the same number of tokens and keeps reserves, such as bank deposits and short-term government bonds, to back them.
- You use the tokens. You can hold them in a wallet, trade them for other crypto, or send them to someone else.
- You redeem. You return the tokens and receive the currency back, in principle one for one.
The Bundesbank explains the condition that holds this together: a stablecoin is usually more stable than other crypto-assets as long as the reserves are liquid and valuable enough and the tokens can be exchanged for official money at face value at any time. If doubts appear about that promise, many holders may try to redeem at once, and because digital transactions are fast, the situation can turn critical quickly.
What are stablecoins? Back to Basics, by the International Monetary Fund (in English)
The main types of stablecoins
| Type | How the peg is held | Examples | Main weakness |
|---|---|---|---|
| Fiat-backed | Reserves in currency, deposits and short-term bonds held by the issuer | Tether's USDT, Circle's USDC | You rely on the issuer and on how transparent its reserves are |
| Crypto-backed | Other crypto locked in smart contracts, usually worth more than the tokens issued | Dai | The collateral can fall in value quickly, and smart contracts can have bugs |
| Algorithmic | Code that tries to adjust supply and demand, with little or no reserve | TerraUSD (collapsed) | Confidence can vanish, and the peg can break for good |
| Commodity-backed | Reserves in a commodity such as gold | Gold-linked tokens | Smaller market, and trust in the custodian |
Smart contracts, in the crypto-backed row, are programs on a blockchain that run automatically when their conditions are met. Whatever the design, the Bank for International Settlements (BIS) notes that stablecoins of various types have seen substantial deviations from their target value, which shows how fragile the peg can be. The algorithmic type is the one that failed most visibly: according to the Securities and Exchange Commission (SEC), the American markets supervisor, TerraUSD lost its peg to the dollar in May 2022, and the price of it and its sister tokens fell close to zero.
How big the market is
Stablecoins have become a large part of the crypto market. At the moment, DefiLlama's stablecoin tracker shows around 305 billion US dollars in circulation, of which Tether's USDT accounts for about 182 billion and Circle's USDC for about 72 billion. Together those two make up more than 80% of the total, so the market depends heavily on a few issuers.
The growth has not been a straight line. On 1 January of each year, DefiLlama's data show about 27 billion dollars of stablecoins in 2021, 163 billion in 2022, 138 billion in 2023, 130 billion in 2024, 204 billion in 2025 and 305 billion in 2026. The two years of decline came after the TerraUSD collapse of May 2022.
The market is also tied to one currency. The BIS wrote in its Annual Economic Report 2025, published in June 2025, that over 99% of these tokens are denominated in US dollars. For a holder, that means a stablecoin is really a bet on one issuer and on one currency at the same time.
What stablecoins are used for
- The cash side of trading. Many traders move into a stablecoin to step out of a volatile coin without leaving the crypto world. This is the most common use, and it is why they sit next to almost every coin on an exchange.
- Fast transfers. A stablecoin can be sent across a blockchain in minutes at any hour, which some people and businesses use for cross-border payments.
- A bridge to other tools. They are widely used in decentralised finance (DeFi), the lending and trading services that run on blockchains without a bank in the middle, both as collateral (the guarantee pledged for a loan) and for lending, which adds another layer of risk to understand.
- Holding a foreign currency. In places with high inflation, some people hold a dollar token as a store of value. The International Monetary Fund, in its December 2025 paper Understanding Stablecoins, warns that this can contribute to currency substitution, people replacing their own currency with a foreign one, and make capital flows more volatile.
Advantages and limits
Advantages
- A steadier price than most crypto, which makes amounts easier to plan with.
- Fast transfers that work at any hour and are not tied to bank opening times.
- A convenient way to move between crypto assets without going back to a bank account each time.
Limits and risks
- Loss of the peg. The price can slip below its target when confidence drops. The BIS notes that they often trade at varying exchange rates, which undermines the idea of "one token, one dollar".
- Reserve doubts. The Banque de France points out that the management of reserves is not always transparent, so nothing guarantees that an issuer has enough assets.
- Redemption rush. If many holders sell at once, the issuer must sell reserve assets quickly, which can break the peg temporarily.
- Platform and custody risk. Tokens kept on a platform are only as safe as that platform, and a lost seed phrase cannot be recovered.
- No interest, no growth. A stablecoin is a payment tool, not an investment. The BIS also concluded that they fall short on three tests for sound money: singleness, elasticity and integrity.
- Scams. Fake "stablecoin" projects and promises of high yields are common. Our guide to crypto scams shows how to spot them.
The IMF groups the risks into four areas: macro-financial stability, operational efficiency, financial integrity and legal certainty. Rules also differ from one jurisdiction to another, so check what applies where you live. Over our years of investing, we have learned to treat stablecoins as cash with an extra layer of risk, never as savings that earn a safe return.
Where stablecoins fit in your crypto plan
A stablecoin is a tool, not a goal. If you are buying crypto for the first time, our guide to buying cryptocurrency safely explains the first steps, and a stablecoin is often what you hold between trades. For storage, a hardware wallet keeps the keys under your control, although the issuer's promise still matters.
John Bax's book Cryptocurrency Investing classifies the different kinds of coins, stable tokens included, and explains how to build a balanced approach step by step.
John Bax's view
In Cryptocurrency Investing, John Bax places stablecoins on the cash side of a portfolio, not among the investments. His rule of thumb is that they should make up no more than 30% of the cash a portfolio holds, because even simply holding them carries risk, and lending them out on a platform adds more. He presents it as his own framework, not as advice that fits everyone.
If you later want to trade in a more automated way, Crypto Go Bot, which we built, trades your own Kraken account through an API key (a code that lets software place orders on the account) that can trade but cannot withdraw. Trading is risky and the bot also closes trades at a loss, whatever the setting.
How to use a stablecoin carefully, step by step
- Decide the purpose. Is it for trading, a transfer or short-term storage? Not for growth.
- Choose a well-known stablecoin with a clear issuer and published information about its reserves.
- Read what backs it. Look for the type, where reserves are held and how redemption works.
- Buy through a reputable platform, and test with a small amount first.
- Spread the risk. Avoid keeping everything in one token or on one platform.
- Protect access. Use two-factor authentication, and keep any wallet words offline.
- Check the peg from time to time and move out if doubts grow.
Checklist before you hold a stablecoin
- I know which type of stablecoin it is and who issues it.
- I have read how the reserves are held and how to redeem.
- I am not counting on interest or growth from the token itself.
- I do not keep everything on a single platform.
- I understand that a loss of the peg is possible.
- I would recognise a scam promising a high return on a "stable" token.
Who it is for
A stablecoin is a tool, so whether it suits you depends on what you want to do with it.
- Active crypto traders: they can use a stablecoin as the cash side between trades, stepping out of a volatile coin without going back to a bank, as long as they keep an eye on the issuer and the platform.
- People who send money abroad often: a dollar token can move in minutes at any hour, which suits someone who pays across borders regularly and is ready to learn how wallets and network fees work.
- Long-term crypto investors: a small stablecoin balance can act as a reserve ready for the next purchase, sized so that a loss of the peg would not upset their plans.
- Curious beginners: reading how reserves and redemption work is a useful first step before buying any crypto, even for someone who ends up holding no stablecoins at all.
Key terms
- Peg: the value a stablecoin aims to keep, usually one US dollar per token.
- Depeg: a period when the market price moves away from the peg, for example to 0.95 dollars.
- Reserves: the assets, such as bank deposits and short-term government bonds, that an issuer holds to back its tokens.
- Redemption: handing tokens back to the issuer and receiving the reference currency in exchange.
- Fiat-backed stablecoin: a token backed by reserves in an official currency, as USDT and USDC are.
- Algorithmic stablecoin: a token that tries to hold its peg with code that adjusts the supply, with little or no reserve behind it.
Frequently asked questions
What are stablecoins?
They are crypto tokens designed to keep a stable value, usually by following a currency such as the US dollar. Each token is meant to be redeemable for one unit of that currency.
Is a stablecoin safe?
They are steadier than most crypto, but not safe in an absolute sense. The peg can break if the reserves are doubted, if many holders redeem at once, or if the platform holding your tokens fails.
What is the difference between USDT and USDC?
Both are fiat-backed tokens tracking the US dollar, issued by different companies: Tether for USDT and Circle for USDC. They differ in their issuer, their reserves and how each one publishes information about them.
Can a stablecoin lose its value?
Yes. An algorithmic stablecoin, TerraUSD, collapsed in May 2022, and even reserve-backed tokens have traded below their target at times. That is why reading the reserves and diversifying matters.
Does a stablecoin pay interest?
The token itself does not. Some platforms offer a reward for lending or locking them, but that adds the risk of the platform and of the strategy behind it, so treat any promised yield with caution.
Can I make money with a stablecoin?
A stablecoin is not designed to grow in value. Its job is to stay steady, so gains or losses come from what you do with it, such as trading, and those activities carry their own risks.
Where should I keep my stable tokens?
It depends on the amount and your habits. A reputable platform with strong account security is convenient, while a wallet you control keeps the keys with you, but you must then protect your backup.
Sources
- Banco de España, Definition of a stablecoin
- Deutsche Bundesbank, Kaurischnecken und Stablecoins
- Bank for International Settlements, Annual Economic Report 2025, chapter III, June 2025
- International Monetary Fund, Understanding Stablecoins, December 2025
- Banque de France, Crypto-actifs et Stable coins
- U.S. Securities and Exchange Commission, SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes, 16 February 2023
- DefiLlama, Stablecoin market data
- Wikipedia, Stablecoin and TerraUSD
