Stablecoins: what they are and how to use them

A stablecoin is a cryptocurrency designed to keep a steady price, usually $1, by tracking a regular currency such as the US dollar. People use stablecoins to move money between crypto apps, park funds without the big price swings of Bitcoin, and send value across borders. They are useful, but "stable" is a goal, not a guarantee: a stablecoin is only as safe as whatever stands behind it.

This guide explains how stablecoins work, the main types, the real risks, and how to use them safely. If you are new to crypto, start with What is cryptocurrency? first.

What is a stablecoin?

Most cryptocurrencies, such as Bitcoin, have prices that move every minute. A stablecoin tries to avoid that. Its value is "pegged" (tied) to something stable, most often one US dollar. So 1 stablecoin should always be worth about $1.

The best-known examples are USDT (issued by Tether) and USDC (issued by Circle). Both aim to be worth one US dollar. There are also stablecoins tied to the euro and other currencies, and some tied to gold.

A stablecoin lives on a blockchain, just like other crypto. That means you can hold it in a crypto wallet, send it to anyone in minutes, and use it on crypto exchanges and apps, at any hour of the day.

How stablecoins keep their price: the main types

Not all stablecoins hold their peg in the same way. The method matters, because it decides how much risk you carry.

1. Backed by cash and government bonds (fiat-backed)

A company issues one token for every dollar (or dollar-like asset) it holds in reserve. "Reserves" are the money and assets kept to back the tokens, such as cash, bank deposits and short-term US government bonds (Treasury bills). In theory, you can always swap one token back for one dollar with the issuer. USDT and USDC work this way. This is the most common type.

2. Backed by other crypto (crypto-collateralised)

Here the stablecoin is backed by other cryptocurrencies locked in smart contracts (programs that run on a blockchain). Because crypto prices swing, these systems usually lock up more value than they issue, for example $150 of crypto for $100 of stablecoins. DAI is a well-known example. The risk is that a very sharp crash in the backing crypto can strain the system.

3. Algorithmic stablecoins

These try to hold the peg with code and market incentives rather than real reserves. The most famous example failed. TerraUSD (UST) relied on a rule that one UST could always be swapped for $1 worth of another token, LUNA. In May 2022 confidence broke, people rushed to exit, and UST fell to around 22 cents while LUNA's price collapsed from about $31 to about $0.01. Billions of dollars of savings were wiped out. The lesson: a promise without real assets behind it can fail fast.

4. Backed by commodities

Some tokens are tied to the price of a physical asset, most often gold. Each token is meant to represent a set amount of gold held in a vault. Their price follows gold, so they are "stable" only compared with the gold price, not the dollar.

What people use stablecoins for

• Trading. Many crypto exchanges price coins in USDT or USDC. Traders move into stablecoins to step out of a volatile coin without cashing out to a bank.
• Sending money abroad. A stablecoin transfer can arrive in minutes, any day of the week. The person receiving it still needs a legal way to turn it into local money.
• Holding dollars. In places with high inflation or limited access to US dollars, some people hold dollar stablecoins as a store of value. Check your local rules first.
• Using crypto apps. Lending, borrowing and other decentralised finance (DeFi) apps often run on stablecoins.

The risks you need to know

Stablecoins are often sold as "safe crypto". They are less volatile, but they still carry real risks.

• Losing the peg ("de-pegging"). Even a well-backed stablecoin can slip. In March 2023, USDC fell below 87 cents for a short time after Circle said $3.3 billion of its reserves (about 8% of the total) were held at Silicon Valley Bank, which had just failed. It recovered once the deposits were protected, but holders who sold in panic lost money.
• Issuer and reserve risk. With fiat-backed coins, you trust a company to really hold the reserves and to let people redeem. Look for regular, independent reports on what the reserves are made of.
• Freezing. Big issuers such as Tether and Circle can freeze tokens at a specific address, for example on a court or police order. Your funds can be locked if they are linked to crime, even by mistake.
• Platform risk. If you keep stablecoins on an exchange or lending app and that company fails, you may not get them back. Several crypto lenders went bankrupt in 2022, trapping customer funds.
• "High yield" offers. Apps that promise big, steady interest on stablecoins are taking risks with your money somewhere. TerraUSD's main app offered close to 20% a year before it collapsed.
• Scams. Scammers love USDT because it moves fast and looks like cash. Fake job and "task" schemes often ask you to deposit USDT. Read our guide to common crypto scams.

How stablecoins are regulated

Rules are catching up fast, and they differ by country.

• United States. The GENIUS Act became law on 18 July 2025 (Public Law 119-27). It creates a federal framework for "payment stablecoins". Issuers must hold at least one dollar of permitted reserves (such as cash, insured bank deposits and short-term Treasury bills) for every token. They cannot pay interest to holders, and holders get priority over other creditors if the issuer goes bankrupt. Regulators are still writing the detailed rules.
• European Union. Under the EU's MiCA regulation, stablecoin rules have applied since 30 June 2024. A stablecoin tied to one currency is an "e-money token" and can only be issued by an authorised bank or electronic money institution. Holders have the right to redeem at face value, free of charge, and issuers cannot pay interest.
• Elsewhere. Other countries, including the UK, the UAE and India, have their own approaches, and these are changing. Check your local regulator's website before you buy.

Rules on what an issuer must do do not protect you from every loss. They also do not cover tokens issued outside that country's system.

How to use stablecoins safely: step by step

1. Pick a regulated platform. Buy stablecoins through an exchange that is licensed in your country. Our guide on how to choose a crypto exchange explains what to check.
2. Choose well-known, well-backed coins. Prefer fiat-backed stablecoins whose issuers publish regular reserve reports. Avoid new or algorithmic coins promising extra returns.
3. Check the network before sending. The same stablecoin can exist on several blockchains (networks). The sender and receiver must use the same network, or funds can be lost. Fees differ a lot between networks and change often, so check before you send.
4. Check the contract address. Scammers create fake tokens with the same name. The real contract address (the token's unique ID on the blockchain) is listed on the issuer's official website.
5. Send a small test first. For a new address, send a small amount, confirm it arrived, then send the rest.
6. Think about storage. For larger amounts held long term, consider moving them to a wallet you control. See crypto wallets explained.
7. Keep records for tax. In many countries, swapping one crypto for another, including into a stablecoin, can be a taxable event. Read how crypto is taxed.

FAQ

Is a stablecoin the same as a dollar in the bank?

No. A bank deposit may be covered by a government deposit insurance scheme, up to a limit. A stablecoin is a claim on a private issuer and is generally not covered by that kind of insurance. Its value depends on the issuer's reserves and on people trusting it.

Can a stablecoin go to zero?

Yes. TerraUSD lost almost all its value in May 2022. Well-backed, fiat-backed stablecoins are much less likely to collapse, but they can still lose their peg for a time.

Do stablecoins pay interest?

The stablecoin itself usually does not. In the US and EU, the rules described above stop issuers from paying interest to holders. Some exchanges and apps offer "rewards" on stablecoins, but that comes from how they use your money, and it adds risk.

Which stablecoin is the best?

There is no single best one. Look at how it is backed, whether the issuer is regulated where you live, how often it publishes reserve reports, and whether your exchange supports it on the network you need.

Are stablecoins legal?

In many countries, yes, but the rules differ and are changing. Some countries limit which stablecoins can be offered to the public. Check your local regulator before buying.

This is not financial advice. Crypto is volatile and you can lose money. Do your own research.