What Are Stablecoins? | Bankrate

A stablecoin is one type of cryptocurrency that is designed to maintain a fixed value over time. The value of a stablecoin is typically pegged to a specific real currency, often the U.S. dollar. In this setup, one unit of the cryptocurrency typically equals one unit of the real currency. Unlike highly volatile cryptocurrencies such as Bitcoin, the price of stablecoins is not meant to fluctuate.

While they may seem safe, stablecoins present a number of risks to users and investors, and the GENIUS Act introduces regulation that reduces but does not fully eliminate the risk of stablecoins.

Here’s how stablecoins work, what risks they present and one way to check if a stablecoin is safe.

How stablecoins work

A stablecoin is a cryptocurrency whose value is fixed to another asset, often currencies such as the U.S. dollar or the euro, though other assets are possible. This kind of crypto coin tracks the underlying asset, making its value stable over time, relative to the currency it’s pegged to. In effect, it’s as if the underlying asset has gone electronic, for example, like a digital dollar.

Because their goal is to track a real currency, stablecoins are often backed by the specific assets they’re pegged to. For example, the organization issuing a stablecoin typically sets up a reserve at a financial institution. So, a stablecoin issuer could hold $100 million in reserve and issue 100 million coins with a fixed value of $1 per coin. If a stablecoin’s owner wants to cash out the coin, the real money can ultimately be taken from the reserve.

This structure stands in contrast to most cryptocurrencies, such as Bitcoin and Ethereum, which are backed by nothing at all — no assets or cash flow of an underlying entity. Unlike stablecoins, these other cryptocurrencies fluctuate greatly, as speculators push their prices up and down as they trade for profits.

Most popular stablecoins

Stablecoins don’t usually get the same press (and hype) as other cryptocurrencies, in part because they don’t offer the same type of “get rich quick” opportunity. But a few are among the most popular cryptocurrencies by market capitalization, as of July 2025.

Of course, the size of these coins pales in comparison to the largest cryptocurrencies, such as Bitcoin, with a market cap of nearly $2.4 trillion, and Ethereum, valued at more than $428 billion.

TerraUSD, an algorithmic stablecoin, had been another popular option, but it lost its peg to the dollar in May 2022. This stablecoin used other cryptocurrencies and a sophisticated system of arbitrage to maintain its valuation at the 1:1 level. But the 2022 decline in crypto markets and the subsequent loss of confidence in the stablecoin sent its price to effectively zero.

Risks of stablecoins

At first glance, stablecoins may appear to be low risk. In comparison to popular cryptocurrencies that are backed by nothing, they are. But stablecoins present some typical crypto risks and at least one of their own kind of risk, too.

• Security: Like other cryptocurrencies, stablecoins must be held somewhere, whether it’s your own digital wallet or with a broker or exchange. And that presents risks, since a given trading platform may not be secure enough or may have some vulnerabilities. So like other cryptocurrencies, your stablecoins could be stolen — and once they’re gone, they’re gone.
• Counterparty risk: While it may seem like cryptocurrency is highly decentralized, in reality you’re dealing with several parties in a transaction, including the bank holding the reserves and the organization issuing the stablecoin. They must be doing the right things (security, properly reserving, etc.) for the currency to maintain its value. Even the recently passed GENIUS Act does not fully safeguard owners against these risks, and owners could be creditors of a coin issuer or bank if the coin blows up.
• Reserve risk: A key element of the stablecoin ecosystem are the reserves backing a stablecoin. Those reserves are the last backstop for a stablecoin’s value. Without them, the coin issuer cannot guarantee the value of a stablecoin with full confidence.
• Lack of confidence: If a stablecoin is not sufficiently backed by hard assets, especially cash, it could suffer a run and lose the peg against its target currency. That’s effectively what happened to TerraUSD since it wasn’t backstopped by cash but rather by other cryptocurrencies. The price of the stablecoin broke and spiraled downward, as traders lost confidence in its ability to maintain the peg.

The primary risk of stablecoins is that they aren’t fully backed by the reserve currencies they say they are. In an ideal situation, the issuer of the stablecoin has enough reserves of the currencies (in cash or other highly liquid, safe investments) to fully support the stablecoin. Any less than 100 percent and risk is introduced.

— Anthony Citrano
former founder of Acquicent, a marketplace for NFTs

Why stablecoins are used in crypto trading?

Stablecoins solve one of the key problems with many mainstream cryptocurrencies, namely, that their drastic fluctuations make it tough, if not impossible, to use them for real transactions.

“Digital currencies like Bitcoin and Ethereum are tremendously volatile, which makes pricing things in their terms very difficult,” says Citrano. “Stablecoins avoid this issue by locking their prices to a known reserve currency.”

In addition, their stability allows many stablecoins to be used as a functional currency within a crypto brokerage. For example, traders might convert Bitcoin into a stablecoin such as Tether, rather than into dollars. Stablecoins are available 24/7, making them more accessible than cash obtained through the banking system, which is closed overnight and on weekends.

Stablecoins can also be used with smart contracts, which are a kind of electronic contract that is automatically executed when its terms are fulfilled. The stability of the digital currency also helps circumvent disagreements that could arise when dealing with more volatile cryptocurrencies.

How safe are stablecoins?

While they purport to be safe, stablecoins may be anything but that when tough times hit the cryptocurrency markets. In addition, the GENIUS Act does not eliminate some key risks to stablecoins, meaning the coin’s owners must continue to bear those risks. In short, stablecoins may act like cash, but they are not as safe as cash.

Finally, the best guarantee of a currency’s safety is that people will widely accept it in exchange for goods and services. And the only widely accepted currency in the U.S. — indeed, the only price in which products are ultimately denominated — is dollars.

The safety of stablecoin reserves

Stablecoin owners should pay careful attention to exactly what is backing their coin. The stablecoin Tether has come under fire in the past for its disclosures on reserves. Those who think the cryptocurrency is fully reserved by actual dollars are mistaken.

In 2021, the U.S. Commodity Futures Trading Commission fined Tether $41 million for making untrue statements that its stablecoin was backed 100 percent by actual currency. Since the March 2021 report, Tether has reduced its holdings in commercial paper, and the company said that it would continue decreasing its reliance on this funding.

As of its March 31, 2025, reserve report, Tether still had more in reserves than it had in liabilities, and had switched the composition of its reserves:

• About 81 percent of its reserves are held as cash or cash equivalents, with about 80 percent of that amount in U.S. Treasury bills.
• About 6 percent is secured loans.
• Around 13 percent is precious metals, Bitcoin and “other investments.”

While Tether does have more reserves backing the stablecoin than it’s liable for, several of its investments — Bitcoin and the precious metals — may be volatile. And it’s not really clear what “other investments” consist of, only that the investments here don’t fit any other category. So its reserves — virtually all of which are not hard cash — may still be hit hard in tough times.

These other assets may act like actual cash much of the time, but they’re not real cash. If markets drop, those assets (and the other non-cash assets) could quickly decline in value, making the Tether coin less than fully reserved exactly when it may most need to be.

The GENIUS Act helps address the risk of inadequate reserves by requiring minimum reserves and minimum capital standards. However, unless a stablecoin commits to holding 100 percent (or more) of its reserves in cash, there’s no guarantee that the cash will be there to redeem coins. In this case, the value of stablecoins may prove to be a lot less than stable. Holders of stablecoins may end up on the losing end of an old-fashioned bank run, a surprising fate for a technology that markets itself as highly modern.

Risks left unaddressed by the GENIUS Act

Owners of stablecoins also need to pay attention to two other major issues when thinking about the safety of stablecoins: custodian risk and issuer risk. These risks are not adequately addressed by the GENIUS Act, leaving owners of stablecoins exposed.

• Custodian risk is the risk created when a financial institution holds your stablecoins. If the custodian goes bankrupt or is ripped off — as happened to several crypto exchanges in 2022 — clients may have serious difficulty getting their coins back out. In this case, you may end up an unsecured creditor of the custodian and forced to sue to get your coins.
• A potentially larger concern is issuer risk, which could occur if a stablecoin issuer goes bankrupt, perhaps due to not having enough reserves. Because of the way that the GENIUS Act structures bankruptcy claims, owners of stablecoins may not be able to be made whole if a stablecoin issuer goes bankrupt. So that creates further risk for owners.

Bottom line

Stablecoins provide some of the stability that is lacking in most cryptocurrencies. But those using stablecoins should know the risks they’re taking when they own them. While in most periods it may seem like stablecoins have limited risks, stablecoins may become the riskiest in a crisis when it ought to be the safest to own them.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.