Stablecoin

Cryptocurrencies, like Bitcoin, have captured the imagination of many, but their wild price swings make them tricky for everyday use. Imagine buying a coffee with Bitcoin, only for its value to plummet moments later, leaving the vendor at a loss. This is where stablecoins step in, offering a much-needed bridge between the dynamic world of digital assets and the steady predictability we expect from traditional money.

What Are Stablecoins?

Stablecoins are a special type of cryptocurrency designed to maintain a stable value. Unlike Bitcoin or Ethereum, which can see their prices jump or fall dramatically in a single day, stablecoins aim for consistency. They achieve this stability by pegging their value to external references, most commonly fiat currencies like the U.S. dollar, but also commodities such as gold, or even other financial instruments. This peg means that one stablecoin generally holds a consistent value, often one-to-one with the asset it mirrors, making it a reliable medium for daily financial activities. Stablecoins offer a crypto alternative with reduced volatility, providing a more consistent medium of exchange for everyday transactional needs.

Stablecoins Versus Bitcoin: The Quest for Stability

Bitcoin, while immensely popular and the most well-known cryptocurrency, famously experiences significant price swings. For example, Bitcoin’s price soared from under $5,000 in March 2020 to over $63,000 by April 2021, only to drop by nearly 50% in the following two months. It can frequently fluctuate by more than 10% in just a few hours. This extreme volatility appeals to traders looking for quick gains, but it poses significant risks for everyday transactions. No one wants to become famous for paying 10,000 Bitcoins for two pizzas, as one early Bitcoin transaction demonstrated. Similarly, merchants do not want to lose money if the cryptocurrency they accept as payment suddenly loses value.

A currency needs to stay relatively stable to function effectively as a medium of exchange, especially when it is not legal tender. In traditional currency exchanges, daily movements of even 1% are rare. Stablecoins directly address this problem by promising to hold their value steady through various mechanisms. Therefore, to be clear, Bitcoin is not a stablecoin. Stablecoins specifically exist to offer an alternative to the high volatility of popular cryptocurrencies like Bitcoin, making them far more suitable for common transactions.

How Stablecoins Work: Maintaining Their Peg

Stablecoins work by attempting to peg their market value to an external reference. This external reference is usually a fiat currency, like the U.S. dollar, or the price of a commodity such as gold. They maintain this peg by holding reserve assets as collateral or by using complex algorithmic formulas that control their supply. The core idea is to create a crypto asset with significantly lower price volatility, which makes them better suited for use in transactions.

Exploring the Different Types of Stablecoins

The stability of stablecoins comes from different methods, leading to four primary types: fiat-collateralized, commodity-backed, crypto-collateralized, and algorithmic. Each type employs distinct mechanisms to maintain its price stability.

Fiat-Collateralized Stablecoins

Fiat-collateralized stablecoins are the most common type, backed by reserves of traditional currencies like the U.S. dollar. Independent custodians securely hold these reserves, and they undergo regular audits to verify their existence and value. This direct backing provides a straightforward and often trusted method for maintaining stability. One stablecoin typically represents one unit of the underlying fiat currency, such as one U.S. dollar.

Tether (USDT) and TrueUSD (TUSD) stand out as popular examples of stablecoins backed by U.S. dollar reserves, maintaining a 1:1 parity with the dollar. As of late June 2024, Tether (USDT) was the third-largest cryptocurrency by market capitalization, with a value exceeding $112 billion. USDC, issued by US-based Circle, also maintains a 1:1 peg to the dollar and accounts for roughly 25% of the total stablecoin market.

Commodity-Backed Stablecoins

Commodity-backed stablecoins are a specialized type of collateralized stablecoin. Instead of fiat currency, these stablecoins link their value to physical commodities like gold or oil. Third-party custodians typically hold the actual commodity or related investments that back these digital tokens.

Tether Gold (XAUt) is a prominent example of a commodity-backed token, specifically backed by gold reserves. The terms of service indicate that an unnamed custodian in Switzerland holds this gold. A Gold Token holder can even choose to receive physical delivery of their gold bar in Switzerland, subject to fees, if they redeem their token.

Crypto-Collateralized Stablecoins

Crypto-collateralized stablecoins derive their stability from being backed by other cryptocurrencies. Because the reserve cryptocurrency itself can experience high volatility, these stablecoins are generally overcollateralized. This means the value of the cryptocurrency held in reserves significantly exceeds the value of the stablecoins issued. This overcollateralization acts as a buffer, insuring against potential price declines in the reserve cryptocurrency.

For instance, cryptocurrencies worth $2 million might back $1 million in a crypto-backed stablecoin, providing insurance against a 50% drop in the reserve cryptocurrency’s price. MakerDAO’s Dai (DAI) serves as a prime example. It pegs its value to the U.S. dollar but uses Ethereum (ETH) and other cryptocurrencies as backing, typically holding about 155% of the DAI stablecoin’s value in circulation.

Algorithmic Stablecoins

Algorithmic these coins represent a distinct approach as they may or may not hold reserve assets. Their primary method for maintaining a stable value involves controlling the stablecoin’s supply through an algorithm—essentially, a computer program running a preset formula. This method aims to mimic the functions of central banks, which also do not rely on a reserve asset to keep their currency stable. However, algorithmic stablecoin issuers lack the crucial advantages of central banks, such as public monetary policy setting based on clear parameters and the credibility that comes from issuing legal tender.

This reliance on algorithms can expose algorithmic stablecoins to significant risks. The dramatic price plunge of TerraUSD (UST) on May 11, 2022, tragically demonstrated this vulnerability. Its value plummeted by over 60%, completely shattering its peg to the U.S. dollar, as the price of its related Luna token, used for the peg, slumped by more than 80% overnight. In Europe, the Markets in Crypto Assets Regulation, which took effect in 2023, essentially bans algorithmic stablecoins, highlighting the regulatory skepticism surrounding this model.

Leading and Their Market Presence

The total market value of these coins saw a significant surge, growing from $20 billion in 2020 to $246 billion by May 2025. This growth reflects their increasing popularity, especially for digital payments.

Here is a list of some of the top stablecoins by market capitalization, demonstrating their current standing and typical price, which ideally remains very close to their pegged value (e.g., $1.00 for USD-pegged coins):

• Tether (USDT): With a price hovering around $0.9998, Tether commands the largest share of the stablecoin market. Its market capitalization stands at an impressive $163.87 billion. It is the most widely used stablecoin and consistently ranks among the top cryptocurrencies by market capitalization.
• USDC: Priced at about $0.9997, USDC holds a substantial market capitalization of around $64.18 billion.
• Ethena USDe (USDe): This priced at $1.00, has a market capitalization of approximately $9.14 billion.
• Dai (DAI): Holding its $1.00 peg, Dai’s market capitalization reaches about $5.37 billion.
• World Liberty Financial USD (USD1): These coins trades around $0.9994 and has a market capitalization of approximately $2.17 billion. This stablecoin has ties to the Trump family.
• First Digital USD (FDUSD): With a price of $0.9978, FDUSD has a market capitalization of about $1.45 billion.
• PayPal USD (PYUSD): Trading at $0.9995, PYUSD holds a market capitalization of roughly $1.01 billion.
• Ripple USD (RLUSD): Priced at $1.00, RLUSD has a market capitalization of approximately $602.78 million.
• USDD: This stablecoin typically sells for $0.9995, with a market capitalization around $571.14 million.
• TrueUSD (TUSD): At a price of $0.9967, TrueUSD has a market capitalization of about $492.9 million.

The value of stablecoins, particularly those pegged to fiat currencies, aims for constancy, often maintaining a 1:1 ratio. You can typically find stablecoins like Tether on most major crypto exchanges, including Kraken, Binance, and Coinbase.

Not Your Typical Stock

When people ask about “stablecoin stock,” they are often thinking about traditional company shares. However, stablecoins are not stocks in the conventional sense; they are cryptocurrencies designed for stability. You do not purchase shares of a company that issues stablecoins as you would with a typical stock. Instead, you directly acquire the stablecoin itself, which functions as a digital asset.

You can “invest” in stablecoins by buying them on various cryptocurrency exchanges and apps. These platforms allow you to trade other cryptocurrencies for stablecoins, effectively converting volatile assets into a more stable digital form or simply purchasing stablecoins directly with fiat currency. For example, you can acquire Tether (USDT) on platforms like Kraken, Coinbase, and Binance. Holding stablecoins can serve as a safe haven during turbulent market conditions for cryptocurrency traders or as a convenient medium for transactions in the digital economy.

The Risks and Considerations

Despite their design for stability, stablecoins are not without their own set of risks and disadvantages. Understanding these challenges helps users approach them with caution.

One primary concern involves the need for trust in the entity that holds the reserve assets. While most auditors are trustworthy, the requirement for third-party auditors to verify reserves introduces an additional layer of reliance in a system fundamentally meant to minimize third-party involvement. If the entity holding the reserves proves untrustworthy or mismanages assets, the stablecoin could lose its value, potentially causing a loss equivalent to a bank run if the one-to-one peg falls apart.

Fiat-collateralized stablecoins, while stable against other cryptocurrencies, remain subject to the same inflation and monetary policy issues as their underlying fiat currencies. This means if the U.S. dollar experiences significant inflation, a dollar-pegged stablecoin would also effectively lose purchasing power. Crypto-collateralized stablecoins, despite their overcollateralization, are inherently exposed to the volatility of the underlying cryptocurrencies they use as backing. While the overcollateralization offers a buffer, extreme market crashes could still pose a threat to their peg.

Lastly, as seen with the TerraUSD example, algorithmic stablecoins rely on complex algorithms that may not always work as expected, potentially leading to severe instability and significant losses. Additionally, users face general security risks associated with digital assets, such as forgetting the passcodes to their crypto wallets, which can result in irreversible loss of funds.

The Regulatory Landscape and Stablecoins’ Political Ties

Given the rapid growth of the stablecoin market, which reached $162 billion, stablecoins continue to come under increasing scrutiny from regulators worldwide. Their potential impact on the broader financial system has prompted various jurisdictions to implement measures to ensure adequate reserve backing and overall market stability.

Congressional Action: The GENIUS Act

In the United States, politicians have increased calls for tighter stablecoin regulation. Senator Cynthia Lummis called for regular audits of stablecoin issuers in November 2021. In 2024, Senators Lummis and Kirsten Gillibrand introduced a major bill—the Lummis-Gillibrand Payment Stablecoin Act (S.4155). It aims to create a clear regulatory framework for stablecoins. The bill would ban anyone from issuing stablecoins unless they are a registered non-depository trust or a licensed depository institution.

This proposed legislation is now moving through Congress under the name “GENIUS Act,” which stands for “Guiding and Establishing National Innovation for U.S. Stablecoins of 2025.” The Senate is deliberating this bill, and it recently passed a major procedural hurdle despite initial resistance from some Democrats. Proponents believe this landmark bill would boost the crypto industry’s legitimacy. It could also lead to mainstream use of stablecoins for digital payments. Experts say if the law passes, it may drive growth in the stablecoin sector. This could attract both Wall Street firms and new startups. For major stablecoin issuers, U.S.-based Circle would likely benefit more from increased regulation than El Salvador-based Tether.

However, not everyone welcomes the GENIUS Act. Critics argue that the bill does not adequately address the risks associated with stablecoins. Some suggest that the proposed framework is dangerously weak and could expose taxpayers to crypto-fueled bailouts, advocating for tight regulation similar to that imposed on banks to protect consumers and the economy from financial crashes.

Stablecoins and the Trump Connection

Interestingly, the rise of stablecoin regulation and interest in the crypto market has gained significant momentum during what some analysts describe as a major revival for cryptocurrencies under President Donald Trump’s second term. The crypto industry actively supported Trump’s reelection campaign and various congressional races, pouring money into these political efforts. Some observers characterize this legislative focus as a “return on investment” for the crypto industry’s campaign spending.

Adding to the political discussion, critics have pointed to the Trump family’s ties to the crypto industry. For example, World Liberty Financial, a company reportedly tied to the Trump family, has issued its own stablecoin, USD1, which currently holds a market capitalization of over $2 billion. This direct link further highlights the intertwining of stablecoin development and the political landscape.

Global Regulatory Efforts

Beyond the U.S., global regulatory bodies are also stepping up. In October 2021, the International Organization of Securities Commissions (IOSCO) made key recommendations. They suggested regulating stablecoins as financial market infrastructure. This puts them alongside payment systems and clearinghouses. The rules target stablecoins seen as “systemically important” — those that could disrupt payment and settlement systems.

Europe has taken a particularly strong stance with its Markets in Crypto Assets Regulation (MiCA), which took effect in 2023. This regulation effectively bans algorithmic stablecoins, reflecting concerns about their inherent instability. For all other stablecoin types, MiCA mandates that a third party must hold their backing assets in custody. Furthermore, the reserves must be liquid and maintain a strict 1:1 ratio of assets to coins, underscoring a commitment to robust backing and transparency.

Regulatory oversight is increasing worldwide. Stablecoins offer a bridge between traditional finance and the volatile crypto world. However, they must adapt to stricter rules to stay stable and protect the broader financial system. Despite some political resistance, experts anticipate continued progress in stablecoin regulation.