StablecoinUSDT
A stablecoin is a cryptocurrency designed to hold a steady value, usually one US dollar, typically by holding reserves.
Most crypto assets swing wildly in price. Stablecoins are designed not to: one coin is meant to be worth one dollar (or another reference asset) at all times. That makes them the cash of crypto markets — used to price trading pairs, park money between trades, and move value between exchanges. How stable they really are depends on what backs them and whether holders can redeem them. This entry explains the main types, the risks, and what traders should check.
- Category
- Cryptocurrency and Blockchain
- Reading time
- 5 min
- Also called
- Stable coin, Stablecoins, Tether
- Updated
A stablecoin in plain words
A dollar stablecoin is a token that aims to be worth exactly $1. The most common kind is backed by reserves: for every coin issued, the issuer holds about a dollar in cash or short-term government debt, and promises to swap coins back for dollars.
In April 2025 the SEC’s Division of Corporation Finance described “covered stablecoins” as coins designed to hold a one-for-one value with the US dollar, redeemable one-for-one, and backed by low-risk, readily liquid reserve assets worth at least the coins in circulation.1
How a reserve-backed stablecoin works, step by step
Minting
An approved customer sends dollars to the issuer, which creates (mints) the same number of coins.
Holding reserves
The issuer holds reserve assets — for example cash, bank deposits, Treasury bills and certain money market funds — worth at least the coins outstanding.1
Trading
Coins move freely between wallets and exchanges and are used as the quote currency in many trading pairs. See Trading Pair.
Redeeming
Customers who can redeem send coins back and receive dollars one-for-one; the coins are destroyed (burned).1
Arbitrage keeps the peg
If the coin trades below $1, redeemers can buy cheap coins and redeem them for $1; above $1, they can mint and sell. That pulls the price back to the peg.
Disclosure
Issuers publish reserve reports or attestations; check how often, by whom, and what assets they hold. See Proof of Reserves.
Worked examples
Example 1 — Parking between trades
ParkingA trader sells 0.5 BTC at $60,000 for 30,000 USDT instead of withdrawing to a bank, and buys back later.
| Exposure while parked | ≈ $30,000, not BTC price |
| Remaining risk | Stablecoin and exchange risk |
Stablecoins remove crypto price risk but not the risks of the issuer, the reserves or the exchange holding them.2 See Counterparty Risk.
Example 2 — A small depeg and arbitrage
PegDuring market stress a stablecoin trades at $0.985. An eligible customer buys 100,000 coins and redeems them for $1 each.
| Cost | $98,500 |
| Redeemed for | $100,000 |
| Gross arbitrage | +$1,500 (before fees and delays) |
Redemption arbitrage is what pulls a reserve-backed coin back to its peg — as long as holders trust that redemptions will be honoured.
Example 3 — When backing fails
DepegA stablecoin relies mainly on an algorithm and a sister token rather than cash reserves. Confidence falls and holders rush to sell.
| Mechanism | Supply adjustments, not redeemable reserves |
| Risk | A loss of confidence can push the price far below $1 |
Algorithmic designs have failed badly in the past. The SEC staff statement expressly excludes them from its view on covered stablecoins.1 See Types of Stablecoin.
Types of stablecoin
| Aspect | Backing | Main risk |
|---|---|---|
| Fiat-reserve (covered) | Cash, deposits, Treasuries, money market funds1 | Issuer, custody and reserve quality |
| Crypto-collateralised | More crypto than coins issued | Collateral crashes; liquidations |
| Algorithmic | Algorithms adjusting supply, not reserves1 | Loss of confidence; death spiral |
| Commodity-backed | Gold or other commodities | Custody and redemption terms |
How traders use stablecoins
Quote currency
Many crypto pairs are priced in stablecoins, such as BTC/USDT.
Parking funds
Moving to a stablecoin removes crypto price exposure without leaving the exchange.
Moving money between venues
Stablecoins transfer quickly between exchanges and wallets. See Gas Fee.
Collateral and margin
Derivatives exchanges often accept stablecoins as margin. See Perpetual Futures.
Advantages and disadvantages
Advantages
- Stable value relative to the dollar in normal conditions.
- Fast transfers between exchanges and wallets.
- Widely accepted as quote currency and margin.
Disadvantages
- Depends on the issuer’s reserves, custody and honesty.
- Can lose its peg in stress, sometimes briefly, sometimes permanently.
- Only approved customers can usually redeem directly with the issuer.
- Rules differ widely by country and are still changing.
Going deeper
Read as far as you need. Each level builds on the one before it.
Not a bank deposit
Beginner
A stablecoin is not a bank account. Unless a specific law or arrangement provides it, there is no deposit insurance, and your claim depends on the issuer and on the platform holding your coins.
What to check
Intermediate
Look at what the reserves are made of, who examines them and how often, who can redeem and on what terms, and how the coin behaved in past periods of stress. Coins whose reserves are cash and short-term government debt are generally considered the most conservative.
Regulation is changing
Advanced
The SEC staff statement is staff guidance, not a Commission rule, and expresses no view on algorithmic, yield-bearing or non-dollar stablecoins.1 Several jurisdictions have introduced or are introducing dedicated stablecoin rules covering reserves, redemption and disclosure, so the treatment of a given coin can differ from country to country.
Common mistakes
Assuming all stablecoins are equal
Backing, transparency and redemption terms differ widely.
Chasing high yields on stablecoins
High interest on a “stable” asset usually means extra risk somewhere. See APR and APY.
Keeping everything on one exchange
Exchange failures can freeze stablecoin balances along with everything else.
Ignoring the peg in stress
Check the market price, not just the $1 label, during turbulent periods.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Stablecoins aim to hold a fixed value, usually $1.
- Reserve-backed coins hold low-risk liquid assets and can be redeemed one-for-one by eligible customers.
- Redemption arbitrage keeps the peg — while confidence lasts.
- Algorithmic and under-collateralised designs carry much higher risk.
- Stablecoins remove price risk, not issuer, custody or exchange risk.
Frequently asked questions
Are stablecoins safe?
Are stablecoins securities in the US?
Why do USDT and USDC sometimes trade slightly away from $1?
Further learning
- Perpetual Futures
Where stablecoins are often used as margin.
- Liquidity
Why stablecoin pairs are the most liquid in crypto.
- Bid-Ask Spread
The cost of switching between coins and stablecoins.
- Hedging
Another way to reduce crypto exposure.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- U.S. Securities and Exchange Commission. Statement on Stablecoins (Division of Corporation Finance, April 4, 2025) (opens in a new tab) Checked .
- European Central Bank. Stablecoins’ role in crypto and beyond: functions, risks and policy (opens in a new tab) Checked .
Read more elsewhere
- Investopedia: Stablecoin (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.