Stablecoins Explained: How They Keep Their Peg
Stablecoins are cryptocurrencies designed to hold a steady value, usually one US dollar. They are used to trade, to move money quickly and to park funds without leaving the crypto world.
The main types
- Fiat-backed: the issuer says each coin is backed by reserves such as cash and short-term government debt.
- Crypto-backed: coins are backed by other crypto locked in smart contracts, usually with more value locked than coins issued.
- Algorithmic: the price is managed by code and incentives rather than reserves. This type has failed badly in the past.
What can go wrong
- Reserve risk: the backing may not be as strong or as liquid as claimed.
- Depegging: the price can drop below one dollar if confidence falls.
- Regulation: rules differ by country and can change.
- Smart contract risk: for decentralised designs, bugs can cause losses.
Questions to ask before you hold one
- Who issues it and where are they regulated?
- How often are reserves reported or audited?
- How easily can you redeem it?
- How has it behaved in stressful markets?
The bottom line
Stable does not mean risk free. Treat stablecoins as a tool and spread your exposure rather than relying on a single issuer.
Check live prices and market caps for the biggest stablecoins on the Markets page.
This article is for information only and is not financial advice.
