What Is a Stablecoin?

Stablecoins Explained in Less Than 5 Minutes

A stablecoin owner makes a trade.
•••

Anna Stills / Getty Images

A stablecoin is a cryptocurrency with a fixed value. Major stablecoins peg their values to major world currencies like dollars, euros, pounds, and other fiat currencies.

Stablecoins may play an important part in your portfolio, particularly if you’re an active cryptocurrency trader. Let’s take a look at what stablecoins are, how stablecoins work, and major stablecoins cryptocurrency enthusiasts should know about.

Definition and Examples of Stablecoins

A stablecoin is a cryptocurrency asset designed to maintain a fixed value over time. The stablecoins with the biggest market capitalization are worth exactly $1 at any given time (with minor fluctuations here and there), which makes them much more stable than the overall cryptocurrency markets, which are volatile.

Stablecoins are typically linked to major exchanges or cryptocurrency projects. For example, crypto exchange Coinbase helped found USD Coin, and Binance, another exchange, helped launch USD coin. Other stablecoins track the price of currencies like the euro and even the price of gold.

Stablecoin supply increased from around $3 billion in 2019 to more than $100 billion in 2021.

How Do Stablecoins Work?

You can buy, sell, and hold stablecoins like any other cryptocurrency using a crypto exchange or a cryptocurrency wallet. Whenever you make a transaction, it’s recorded on a public ledger known as a “blockchain.” 

The blockchain gives stabelcoins and other crypto unique features you don’t get with regular dollars at your bank. For example, you can send your stablecoins to anyone in the world with an internet connection and a compatible cryptocurrency wallet. While there may be some network fees, stablecoins are more affordable than some banks’ international wire transfers.

For cryptocurrency traders and investors, stablecoins act as a way to take your money out of the markets without converting back to a government-backed fiat currency. Some stablecoins offer interest for holding them in a compatible cryptocurrency account too.

Types of Stablecoins

All stablecoins are cryptocurrencies, but that doesn’t mean they all work the same way. Each company or developer group behind the coin can choose between different blockchain technologies, compatibility, and underlying assets.

A few of the stablecoins that track the US dollar include:

  • Tether
  • USD Coin
  • Binance USD
  • Dai
  • TerraUSD
  • TrueUSD
  • Vai 

While there are many other currencies in the stablecoin landscape, the dollar is tied to a significant chunk of stablecoin market cap.

Each stablecoin may use its own blockchain or trade on another blockchain. For example, Binance USD coin works on both the ERC-20 standard (technical lingo for compatibility with the Ethereum blockchain) and Binance’s own BEP-2 standard.

Do I Need Stablecoins?

Most cryptocurrency investors and traders don’t need stablecoins. They are useful when converting between different cryptocurrencies and for temporarily taking funds out of more volatile cryptocurrencies. And, in some cases, investors may find stablecoins’ steady value useful for daily purchases. However, stablecoins are likely not a good long-term investment for investors who want sizable returns.

Because of some concern around the underlying value of certain stablecoins and the potential for fraud, it’s important to know exactly what you’re buying and how it works.

If you choose to use stablecoins, make sure to buy and hold trustworthy coins. USD Coin from Circle, a consortium that includes Coinbase, for example, follows strict policies and releases monthly audit reports showing that it holds an actual dollar in an account for every USD Coin in circulation. Tether, on the other hand, has drawn claims of potential fraud and major fines from the New York Attorney General’s office.

Alternatives to Stablecoins

If you don’t want to use stablecoins, you have a stable alternative that’s already likely sitting in your bank account: U.S. dollars. While inflation and foreign exchange rate fluctuations may make a dollar worth relatively more or less over time, it’s always worth a dollar when you make a purchase.

Pros and Cons of Stablecoins

Pros
  • Cryptocurrency with stable value

  • Easily tradeable

  • Useful for sending funds


Cons
  • Some stablecoins may not be trustworthy


Pros Explained

  • Cryptocurrency with stable value: Unlike Bitcoin, Ethereum, and Dogecoin, stablecoins have a fixed value, making them more suitable for everyday purchases. 
  • Easily tradeable: You can quickly and easily convert between stablecoins and cryptocurrencies.
  • Useful for sending funds: You can send stablecoins to anyone with a compatible cryptocurrency wallet without any added bank charges or fees (network fees may still apply).

Cons Explained

  • Some stablecoins may not be trustworthy: Tether, the stablecoin with the biggest market capitalization, has received fines and trading prohibitions because of fraudulent activities.

How To Buy Stablecoins

You can acquire stablecoins through any major cryptocurrency exchange, such as Coinbase or Binance. With a funded account, you can buy stablecoins similar to buying shares of stock through a brokerage account.

To hold stablecoins, you will need an account at a cryptocurrency exchange or a compatible cryptocurrency wallet.

Key Takeaways

  • Stablecoins are a type of cryptocurrency pegged to a major fiat currency or an asset like the U.S. dollar.
  • You can buy, sell, hold, and exchange stablecoins similar to other cryptocurrencies.
  • Stablecoins are useful for sending money to family or friends abroad or for any business transaction.
  • Some stablecoins are controversial, notably Tether, so pick your stablecoins with care.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.