Stablecoins: what they are and the risk they hide
A stablecoin is a cryptocurrency designed to hold a steady value, almost always pegged to the dollar: one unit should always be worth around one dollar. They are the infrastructure much of the crypto market runs on: parking capital without leaving the ecosystem, quoting pairs and moving money between platforms. And their name hides the sector's most expensive misunderstanding: "stable" does not mean "safe".
How they hold the price
| Type | How it works | Main risk |
|---|---|---|
| Reserve-backed | The issuer holds dollars and equivalent assets for each unit issued | Reserves not being what they claim: counterparty risk |
| Crypto over-collateralised | Backed by more crypto than issued, to absorb falls | A sharp drop can force chain liquidations |
| Algorithmic | Hold the price via market mechanisms, without equivalent real backing | Have failed catastrophically in the past |
What they are really used for
- Shelter inside the ecosystem: moving from Bitcoin to a stablecoin is like "going to cash" without transferring to a bank.
- Quote currency: most crypto pairs trade against a stablecoin, not against euros.
- Moving capital: transferring value between platforms in minutes.
Why "stable" is not "risk-free"
Here is the important part, plainly: when you hold a reserve-backed stablecoin, your risk is no longer price, it is the issuer. You depend on a private company genuinely holding the assets it claims and being able to return them if everyone asks at once. That is classic counterparty risk, the same kind that exists when leaving money on a platform.
Algorithmic ones are different and more extreme: with no equivalent backing, they depend on the mechanism working under pressure. The sector's history shows it can break, and when it breaks, value does not fall: it disappears.
How to use them sensibly
Three simple rules: do not concentrate all your capital in one stablecoin or one platform; understand its backing before using it (they are not all the same); and remember that holding a balance on a platform is lending it, not custodying it — the principle if you do not control the keys, you do not control the funds applies here too. For the full risk map of the sector, start with Bitcoin vs altcoins.