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Crypto Trader's Guide to Stablecoins

Stablecoins have been an important element of crypto markets since 2014, when the first stables were introduced. The usage of stablecoins and their impact on crypto markets have grown tremendously over that past several years. This guide will explain exactly what stablecoins are and how they are used today in the context of the crypto trader.

Stablecoins Defined




  • Stablecoins are a class of cryptocurrencies.
  • They offer lower volatility than other cryptos.
  • Stables may be backed by fiat, commodities, crypto, or algorithms.
  • Traders use them for low cost trades, earning interest, and more.


What is a Stablecoin?

Stablecoin Definition:

A stablecoin is a class of cryptocurrencies where the coin is issued off a blockchain and it is backed by a more “stable” reserve asset, such as fiat, commodities or other cryptos. With a 1:1 peg to assets like USD, stablecoins become much less volatile than most cryptocurrencies and often act as a gateway for traders who are entering (and exiting) crypto markets.

Types of stablecoins & their reserve assets

In today’s market, you’ll find a wide array of stablecoins that offer price stability by “pegging” the stablecoin’s price to different types of reserve assets:

Fiat-Backed Stablecoins

Many stablecoins are backed by the US dollar, including Tether (USDT), the largest stablecoin by market cap. Other popular fiat-collateralized stablecoins include:

USD Coin (USDC)
Gemini Dollar (GUSD)
TrueUSD (TUSD)

Fiat-backed stablecoins currently have market dominance, with USDT Tether having the lion’s share of stablecoin volume.

Algorithmic Stablecoins

Algorithmic stablecoins such as Ampleforth (AMPL) and TerraUSD (UST) are not backed by a reserve asset but instead use a smart contract to regulate the coin’s price. through a system of trader incentives to keep the price stable. Algo stables are a relatively new type of crypto and have demonstrated vulnerability to whale manipulation, most notably in the depegging of $UST in 2022.

Crypto-Collateralized Stablecoins

Stablecoins that are crypto-collateralized “peg” the coin’s price to a reserve of crypto assets, generally Ethereum.

  • Crypto-backed stablecoins such as Wrapped Bitcoin (wBTC) enable functionality for a cryptocurrency on a different blockchain. In the case of wBTC, Bitcoin becomes available on the Ethereum network in the form of a wrapped token/stablecoin.
  • Another example is MakerDAO’s DAI, which tracks a fiat currency but through onchain balancing mechanisms. This type of crypto-backed stablecoin is generally over-collateralized, meaning their reserves equal much more than a 1:1 ratio to account for crypto’s inherent volatility. (DAI may also be considered an algorithmic stablecoin.)

Commodity-Backed Stablecoins

Stablecoins that have a commodity as a reserve asset attempt to utilize an uncorrelated (to USD) asset to provide stability outside of the fiat system. Several popular stablecoins currently use gold as their collateral, including Paxos Gold (PAXG) and Tether Gold (XAUT).

Benefits of Stablecoins - Why Use Them?

From a crypto trader’s standpoint, stablecoins provide massive benefits, including:

  • Price stability - Holding cryptos puts traders at volatility risk, but stablecoins offer less volatility and thus less risk.
  • Low-cost transactions - Stablecoin transactions generally cost little to zero on certain blockchain networks.
  • Borderless payments - You can send and receive stablecoins to and from almost any location with an Internet device.
  • Fast transactions - Stablecoin payments are near-instant and settle in real time.
  • Earnings potential - Many crypto exchanges and platforms offer benefits to traders who use stablecoins, i.e., staking rewards and interest.
  • A high level of liquidity - Because of their ease of use, low volatility, transaction speed and low cost, stablecoins enjoy a high level of liquidity.

Because stablecoins are issued off a blockchain, they also enjoy the same benefits as most cryptocurrencies, including anonymity and peer-to-peer transactions without costly 3rd party banks and payment companies.

How Crypto Traders Use Stablecoins

Traders in the blockchain space have come to rely on stablecoins as utility tokens that give them access to a variety of crypto financial services.

Accessing DeFi: Traders use stablecoins to access decentralized platforms, which do not accept fiat currencies.
Facilitating trades: Stablecoins allow you to seamlessly trade crypto assets on every cryptocurrency exchange. Traders can use them to reduce their crypto exposure without cashing out.
Earning interest: Many crypto platforms enable you to earn an API just for having a stablecoin balance in your platform account.
Staking rewards: Staking stablecoins can also provide crypto rewards, and in some cases traders get additional cost benefits such as reduced trading fees for using stables.
Business financial services: Stablecoins enable crypto-related businesses to have a global, non-volatile currency to use in business financing, payments and lending, for example.
Risk management: Because of the low volatility and high liquidity of stablecoins, they’ve become an important aspect of crypto trading risk management.
Easy gateway for new traders: Buying a stablecoin creates a gateway from fiat to other digital assets, allowing newcomers to dip their toes with a low-risk and more familiar option.
Payroll: Crypto startups can hire and pay people from anywhere in the world without a bank, while contractors who want to be paid in crypto can easily and cheaply offramp their stablecoins at a centralized exchange.

Examples of Popular Stablecoins

Top_Stablecoins_by_Marketcap_QuadencyTop 5 Stablecoins by Market Cap and Overall Crypto Dominance

Dai (DAI)

An Ethereum-based stablecoin, DAI is often considered one of the first stablecoins to gain major traction in crypto markets, with the MakerDAO protocol having launched it in 2017. DAI is maintained and governed by MakerDAO, a decentralized autonomous organization (DAO). Users wanting to hold DAI send Ethereum-based digital assets to a smart contract for use as overcollateralization while DAI’s price is maintained through the smart contracts to always equal $1.00 USD.

Tether (USDT)

Tether has long been considered the OG of stablecoins and enjoys the largest market cap and trading volume by far. Pegged 1:1 to the US dollar, Tether is widely used by crypto traders for digital asset trading, storing crypto, lending, payments, and on- and off-boarding between crypto and fiat. Tether has a current 24-hour trading volume of $58.58 billion, almost the same as BTC and ETH combined.

TerraUSD (UST)

Compared with DAI and USDT, UST is the new kid on the block but has been gaining major traction. Launched in 2021 by the TerraLUNA Blockchain, UST is a decentralized, algorithmic stablecoin that is pegged 1:1 to the US dollar via Terra’s native token, LUNA. If UST price exceeds $1.00, LUNA holders can reap a profit by exchanging their tokens 1:1 for UST. When the price of UST falls below $1.00, UST holders can exchange their tokens 1:1 for LUNA and also enjoy a risk-free profit.

BinanceUSD (BUSD)

The BUSD stablecoin is a native platform token for Binance Exchange and was launched in 2019 by Binance and Paxos. BUSD stands apart from most stablecoins due to its regulatory standards and is one of only two stablecoins that meets NYDFS standards (the other is Gemini’s GUSD). Pegged 1:1 to the US dollar, BUSD enjoys a high level of liquidity and has long been the 3rd top stablecoin by market cap. BUSD users can participate in yield farming and liquidity pools with more assurances than with some less regulated DeFi applications.

USDC (USDC)

USDC is a stablecoin that is fully backed by the US dollar, compatible with multiple blockchains, and used extensively for payments. Developed by Circle and Coinbase, USDC is currently the second largest stablecoin by market cap. All of USDC’s reserve assets are held in separate accounts with US-regulated financial institutions, making it more of a centralized stablecoin than, for instance, DAI or UST.

Summary

To fully understand the impact of stablecoins on crypto markets, ponder this:

70% of all Bitcoin transactions are executed with Tether using the BTC/USDT trading pair.

Even with dogged scrutiny by regulators and the media, Tether usage has only grown. The usefulness of stablecoins has become very apparent to the crypto trader and it will be exciting to see how the stablecoin market will grow and evolve over the coming years.

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Quadency is a cryptocurrency portfolio management platform that aggregates digital asset exchanges into one easy-to-use interface for traders and investors of all skill levels. Users access simplified automated bot strategies and a 360 portfolio view with a free account.

Disclaimer: The content of this article is for general market education and commentary and is not intended to serve as financial, investment, or any other type of advice.