Stablecoins are digital coins that you own. They’re called “stable” because they’re designed to keep the same value. If you pay one dollar for a stablecoin, you should always be able to trade it back for one dollar. Some stablecoins are tied to other currencies like euros or assets like gold. In the crypto world, stablecoins help manage price changes of tokens like Bitcoin as you trade in and out of them.
Like crypto, stablecoins travel across blockchains in seconds, and each stablecoin can be redeemed - one for one - for the asset that backs it. Trusted issuers of stablecoins securely hold an equal value of whatever currency that token is “pegged” to (like U.S. dollars or gold) - that’s called “reserves.” Independent auditors should be regularly checking those reserves.
This guide explains how price pegs work, how stablecoins are different from other crypto, how people use them and what to think about before buying and using them,
Four Main Types of Stablecoins
There are four basic types of stablecoins - each defined by what keeps the price steady.
Dollar-Backed: The most common type of stablecoin. These tokens are backed one-for-one by U.S. dollars (or another national currency) held in bank accounts or short-term treasuries. Because you can always redeem a coin for a dollar, the price stays close to $1.
Crypto-Backed: Here, other cryptocurrencies serve as the collateral. The backing is usually over-reserved (over-collateralized) to cushion price swings.
Asset-Backed: Instead of cash, these tokens are tied to real-world items such as gold or government bonds. Some, for example, represent ounces of gold, so the pricing of those tokens follows the metal’s market value.
Algorithm-Managed: These coins rely on smart technology versus physical reserves to define their value. The software automatically increases or reduces supply to keep the price near the target.
For many newcomers, starting with dollar-backed stablecoins is an easy first step as they’re straightforward and the most popular ones are widely supported by exchanges and crypto wallets – but each type has its own appeal and trade-offs.
Why People Use Stablecoins
There are a few reasons people like using stablecoins. First, there’s the speed and low cost compared to traditional finance. A stablecoin payment can clear in seconds and cost only a few cents to send, whether you’re paying a freelancer or splitting a dinner bill. The same dollar peg makes international payments cheaper and faster than traditional wire payments, which charge fees and require several days to settle. Crypto traders will sometimes park value in stablecoins (leave it in an exchange or wallet) when crypto prices start to go up or down, locking in gains or hedging against losses without cashing out to a bank.
In decentralized finance (aka DeFi, which refers to financial tools that run on the blockchain), stablecoins act as the steady “digital dollars” that power many services. To generate a return like rewards or interest, some stablecoins are deposited into lending apps, savings protocols, or “liquidity pools,” which are a pot of tokens that many users contribute to.
Businesses use stablecoins for supplier payments, marketplace settlements, and working capital—and they’re super useful across time zones, because the blockchain is open 24/7.
Pros and Cons
There are some big upsides to stablecoins. Prices barely move, so there’s no surprising dips to watch out for, and near-instant, low-fee transfers make everyday spending and payouts easy. Because the value tracks another asset (usually the dollar), budgeting and accounting are straightforward too. Finally, they are a quick bridge between “dollars” and crypto apps.
But there are also some trade-offs. The financial upside to stablecoins is minimal; they’re designed to stay “stable” so unless you are participating in a program that earns interest or rewards, you won’t be making any money by holding them - just like you don't make money holding a physical dollar in your pocket.
You also need to make sure you are dealing with a trusted stablecoin issuer who actually holds the promised reserves and has regular audits. And the more complex stablecoins like those algorithmic ones - can more easily “de-peg” and drop below its target value. Lastly, if for any reason the reserves or algorithms were to fail, a coin can “de-peg” and drop below its target value.
Remember, stablecoins - unlike bank deposits - are not insured.
Are Stablecoins Right for You?
To figure out whether stablecoins make sense for you, take a look at what you actually want from your money day-to-day. Do you pay freelancers in another country? Or perhaps you are trading crypto and you want to keep the proceeds of your sales on the blockchain in a stable asset until your next trade.
Before you pick a stablecoin, DYOR (do your own research). Check that the issuer is trusted and audited - if they don’t publish independent proof of the dollars (or other assets) backing each token, you should move on. Also, make sure the stablecoins can be easily turned back into traditional money when you need them. For example, are they regularly traded on exchanges?
Finally, match the coin to your goal. For short-term needs (paying bills, holding profits between trades, or sending money overseas) price stability is a big advantage. For long-term investments, you may want a mix of assets with more upside potential.
If you want the speed of crypto without price swings, a stablecoin is worth considering.
Getting Started
So you’ve decided you want to hold some stablecoins—what are the steps to getting some? To start, download a well known (and vetted) wallet or open an exchange account that lists stablecoins. Next, fund the account with a bank transfer, convert a small amount of dollars to the coin, and test-send a few tokens to a friend or another wallet you own. The transfer should confirm in seconds and show exactly the amount you sent on the other side. Once you confirm you’re secure, you can easily send, buy and use stablecoins going forward.
Final Thoughts
Stablecoins combine the stability with the speed of crypto. They can make paying, saving, and moving money easier, especially internationally or inside apps. Do your research, and if you’re comfortable, stablecoins can add another practical tool in your financial toolkit.
For more plain-English guides on crypto basics, continue visiting the National Cryptocurrency Association’s learning hub.