This article is general education, not financial, tax or legal advice, and it does not recommend buying any asset. Crypto assets are volatile and you can lose everything you put in. Rules differ by country.
Bitcoin's price can swing wildly in a day, which makes it awkward for everyday payments. Stablecoins try to solve that by holding a steady value, usually one US dollar. They are now among the most used crypto products, and also among the most misunderstood. We compared explainers from Fidelity, security firm Halborn, a US state legislative research office and wallet-infrastructure firm Portal. Fidelity and Portal sell crypto products, and Halborn sells security audits, so we treat their claims about benefits as advocacy, and we left out growth statistics we could not verify.
Key takeaways
- A stablecoin is a token designed to track the value of something stable, most often the US dollar.
- How it keeps the peg (reserves, collateral or an algorithm) determines how risky it is.
- Failures and temporary "depegs" have happened. Stablecoins are generally not insured like bank deposits.
- Regulation is developing quickly, and differs by country.
The Four Types
| Type | How the peg is kept | Main risk |
|---|---|---|
| Fiat-backed | The issuer holds reserves in currency roughly equal to the tokens in circulation | Reserves may be misstated, mismanaged or stuck at a failed bank |
| Commodity-backed | Pegged to something like gold, with matching reserves | Custody and verification of the commodity |
| Crypto-backed | Over-collateralised with other crypto, often through smart contracts | Collateral crashes; smart contract bugs |
| Algorithmic | Software expands or shrinks supply to hold the price, typically without reserves | Fragile under loss of confidence |
How a Peg Works, and Fails
Fiat and commodity coins rely on reserves covering circulating tokens. Crypto-backed coins use excess collateral as a buffer against price swings, and positions are liquidated automatically if collateral falls too far; Halborn warns crashes can trigger mass liquidations. Algorithmic coins adjust supply to push the price back toward the target and, as Portal notes, have fallen out of favour since the 2022 collapse of Terra. The Kansas research office adds that algorithmic stablecoins often fail under market stress.
Depegging means the token's price drifts from its target. Small, temporary drifts of a few cents are common and often self-correct; a larger or lasting gap suggests reserve or confidence problems and can send the price toward zero (Fidelity, Halborn).
What Can Go Wrong: Real Examples
- Bank exposure. Halborn and the Kansas office both cite 2023's Silicon Valley Bank failure, when reserves held there led USDC to lose its peg temporarily.
- Collateral that is itself volatile. The Kansas office notes DAI briefly lost its peg in 2023 because part of its reserves was another volatile stablecoin.
- Algorithmic collapse. Terra's 2022 failure showed how quickly confidence can vanish.
- Misleading reserve claims. The Kansas office reports the CFTC fined Tether $41 million in 2021 over its statements about reserves.
- Misuse of customer funds. The same document points to the 2022 FTX collapse as an example of customer dollars being diverted.
- Smart contract and security flaws. Halborn lists access-control weaknesses that allow unauthorised minting and flash-loan attacks.
Fidelity adds that crypto is not insured by the FDIC or SIPC, lacks the protections of registered securities, faces uncertain regulation and may be more vulnerable to manipulation. Its "fully collateralised" claims about its own stablecoin are the issuer's own assertions, so verify any issuer's reserve reports independently.
What Stablecoins Are Used For
- Cross-border transfers and peer-to-peer payments using one digital wallet instead of several bank accounts (Kansas office).
- Moving in and out of crypto markets without converting back to bank money each time.
- Holding dollar-pegged value in high-inflation economies, according to Portal.
- Business payments and payouts. See accepting crypto payments. Claims that stablecoin transfers are always faster and cheaper are asserted without figures in vendor material, so compare real fees including the ramps.
The Kansas office also reports that stablecoins made up a large share of illicit crypto payments in 2023, which is part of why regulators pay attention.
Regulation Is Moving
The Kansas overview (from late 2024) describes a US federal law passed in 2025 requiring one-to-one reserves in US currency or similarly liquid assets, public redemption policies and monthly reserve disclosures, with state-level regimes in places like New York and California. Rules differ by country and change quickly, so check current local rules before relying on any summary.
A Due-Diligence Checklist
- Who is the issuer, and are they regulated where you live?
- What backs the coin? Are reserve reports regular, detailed and independently attested?
- Where are reserves held (banks, short-term government bills) and how quickly can you redeem?
- Has it ever depegged, and how did it recover?
- For crypto-backed coins: how much collateral, and what are the smart contract risks?
- How would you cash out in your country, and at what cost?
Where This Fits
Stablecoins sit between traditional money and crypto. Compare with Bitcoin and the programmable networks in Ethereum, and read crypto risks for beginners.
References and further reading
This guide was compiled from the sources below. We compared them, kept the points they agree on and wrote the article in our own words. Check the originals for more detail.
- What is a stablecoin? (Fidelity)
- Stablecoins explained: pegging models, depegging risks and security threats (Halborn)
- Stablecoin overview (Kansas Legislative Research Department)
- Understanding stablecoins (Portal)
