April 25, 2025 Welcome back to our blog, where we unravel the exciting worlds of cryptos and automated trading.
Today, we’ll delve into one of the most essential categories of crypto tokens, which collectively have a total market cap exceeding $230,000,000,000. We’re talking about stablecoins. Some of the questions we aim to answer today are what they are, how they work, why they are so important, which types there are (and which are better than others), and what developments we can expect in the future.
Before proceeding, please note that any information presented here is for educational purposes only and should not be considered as recommendations or financial advice. Crypto trading is a complex process, and numerous factors influence success; past performance does not guarantee future results.
Stablecoins are a distinct subcategory in the cryptocurrency world. Unlike the valuation of most cryptocurrencies, which constantly fluctuates due to ever-changing market forces, stablecoins, as their name suggests, aim to maintain a fixed value at all times.
Stablecoins achieve this stability by tying up their value to an external reference, usually another type of asset. Stablecoins play a crucial role in the crypto markets, presenting traders and investors with an option to reduce their exposure to volatility without leaving the crypto ecosystem entirely. In other words, stablecoins allow participants in the crypto world to stay in ‘cash mode’ without the need to convert their cryptos into fiat currencies.
Stablecoins are among the leading forces driving the new wave of cryptocurrency adoption. They offer stability in the unpredictable world of cryptocurrencies, making them more accessible for newcomers and more suitable for commercial use. Since their introduction in 2014, stablecoins have been widely utilized, making them one of the most significant categories of cryptocurrencies in terms of trading volumes and market capitalization.
Hundreds of stablecoin options offer different ways to utilize all types of financial assets. With so many factors at play, there are a few guidelines to adhere to when deciding which stablecoins we should work with and which we should avoid. Let’s take a closer look at some that are currently dominating this niche:
These are the most common types of stablecoins. As their name suggests, these tokens are pegged to the value of fiat currencies. While the U.S. dollar is the most popular option, many stablecoins are available today that tie your cryptos to the value of other fiat currencies.
Stablecoins that fall under this category are considered a safe option for crypto traders, as they are allegedly designed to maintain a 1:1 ratio between the amount of fiat currency they hold and the number of tokens they issue. In practice, that isn’t always the case, as issuers of stablecoins often use other forms of collateral, like corporate and government bonds.
Examples: USDT (Tether), USDC (USD Coin).
These stablecoins are similar to fiat-backed coins, except they utilize tokens of more significant and established cryptocurrencies, such as Bitcoin and Ethereum, rather than fiat currencies.
Although mega-cap cryptos like BTC and ETH display higher volatility levels than most fiat currencies, most stablecoins in this category use a ratio greater than 1:1 to ensure their collateral is always sufficient, even when prices are falling.
Examples: USDS (formerly DAI), Ethena USDe (USDe).
These stablecoins follow the same logic as the first two. The primary difference is that they utilize popular commodities, most notably precious metals such as gold and silver, as collateral. In theory, the commodity in the store should reflect the circulating supply of the token, allowing traders to convert their holdings into physical goods at any given moment.
Examples: Paxos Gold (PAXG), Tether Gold (XAUt).
This category stands alone due to its independence from any collateral to stabilize its value. Instead, they use advanced algorithms to peg their price to other assets, in most cases, to fiat currencies. While this setup, if done correctly, might present some advantages, the most memorable story related to this type of stablecoin is the crash of the token UST back in 2022, when it suddenly lost its peg to the U.S. dollar, sending massive shockwaves through the cryptocurrency world.
Examples: Frax Protocol (FRAX) and Ampleforth (AMPL).
One of the most appealing attributes of stablecoins is their simplicity. Unlike many topics we’ve discussed, stablecoins are relatively straightforward to understand. They are also simple to examine from a technical perspective. The success of stablecoins lies in their ability to meet actual market needs, rather than any technological superiority.
This is why many view the future of stablecoins as less tied to technical developments and more closely tied to their regulatory framework, encouraging governments and leading financial institutions to adopt them.
Central Banks Digital Currencies, or CBDCs, are next in line for the future of the field. CBDCs are tokens designed to serve the same function as today’s stablecoins, with the intention of issuance and control by central banks, including all that entails.
If that sounds like some doomsday science fiction, this trajectory is already well on its way. Most countries today are on a path to introducing their centralized digital currencies, with rumors circulating about plans to ban any competing stablecoin pegged to their fiat currency as part of this process.
While CBDCs present some benefits, most people are concerned about what this development means in terms of governmental censorship. With the power to fully monitor or take charge of our finances whenever they see fit, this might threaten our privacy, autonomy, and financial freedom.
With that said, there’s still a long way to go before this becomes a done deal. Currently, several countries are reconsidering their path due to the previously mentioned concerns, while in other places, CBDC initiatives are already failing because of the general lack of enthusiasm among the average person to adopt these new types of currencies.
For now, the web is packed with resources, including interactive maps, that enable you to track developments on the CBDC front.
Regarding immediate insight for traders about stablecoins, the first and most important thing to do is to choose which ones you work with carefully. We recommend you extensively research your potential stablecoins and not randomly select one. Getting familiar with basic metrics like trading volumes and circulating supply, and knowing how to answer relevant questions like how your chosen stablecoins work, to what assets they are pegged to, and in which way, could save you a lot of discomfort.
While regulation often sounds bad, regulated stablecoins, where respected third parties monitor collateral and sometimes even vouch for them, are generally considered safer choices than less transparent tokens. Trust is crucial to the success of stablecoins, so any project that doesn’t offer a clear view of its operation, including hard evidence to support it, should raise an immediate red flag.
Furthermore, the volatile markets we’ve been experiencing this year are not limited to cryptocurrencies, but also have a significant impact on the value of fiat currencies and precious metals. While not being intentionally designed for it, evaluating the status of a pegged asset and opting for ones in positive momentum can improve a trader’s portfolio performance. For example, with the U.S. dollar underperforming this year and the price of gold setting new all-time highs, in hindsight and leaving all other factors aside, working with gold-backed stablecoins instead of tokens backed by the U.S. dollar was a prudent decision.
In the long term, while it’s too soon to say whether we’re heading towards a fully centralized economy run on CBDCs and controlled by governments, sadly, it’s a looming possibility. Of course, there are some categories that, at least in theory, should have stronger resistance to government and central bank takeovers. With all of this in mind, narrowing down crypto projects that focus on privacy-enhanced peer-to-peer transactions is a good idea to guarantee financial independence in any doomsday scenario.
While often seen as a less exciting part of the crypto world, stablecoins stand at the core, with millions of users trading daily. If you intend to tackle stablecoins, we hope we’ve equipped you with the knowledge to research their properties and thoroughly assess their legitimacy. Choosing the right stablecoin to work with is crucial for traders, but it’s only one part of crypto trading out of many.
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