Article1 min read
Stablecoins, Explained
What keeps a stablecoin at $1, what can break the peg, and what to check before you hold one.
- By
- Lynktor Editorial Team
- Reviewed by
- Lynktor Research Desk
- Updated
A crypto asset built not to move
Most cryptocurrencies swing in price. A stablecoin aims to stay at a fixed value, usually $1, so it can act as a dollar inside crypto markets.
How the peg is held
- Reserve-backed: the issuer holds cash and short-term government debt equal to the coins in circulation, and lets approved parties redeem coins for dollars.
- Crypto-collateralized: users lock up more crypto than the stablecoins they mint, to absorb price drops.
- Algorithmic: code expands and shrinks supply to hold the price. Several of these designs have failed.
A stablecoin is only as stable as what stands behind it.
What can go wrong
A peg can break if reserves are smaller or riskier than claimed, if redemptions are paused, or if many holders try to exit at once. Regulation also differs by country and is still changing.
Before you hold one
- Read the issuer's reserve reports and who audits or attests to them.
- Check how and by whom coins can be redeemed for dollars.
- Remember that stablecoins are not bank deposits and are generally not covered by deposit insurance.
Keep reading
EconomyWhat the Fed Does With Interest RatesHow the Federal Reserve's policy rate reaches your mortgage, your savings account, and the stock market.1 min readInvestingWhy Starting Early Beats Investing MoreTwo savers put in the same $96,000. One ends up with more than twice as much. The difference is twenty years of compounding.1 min readInvestingThe Hidden Cost of a 1% Fund FeeA fee that looks small takes nearly a quarter of a portfolio over thirty years. Here is how the math works.1 min read