Stablecoins in Crypto Trading: What Every Trader Should Know
Why do traders rely so much on stablecoins in crypto trading? What makes them so effective compared to other methods? In a market full of unpredictable price swings, managing risk, avoiding high fees, and staying flexible is tough. Stablecoins seem to be the go-to solution—but why?
This guide breaks it all down. We’ll cover how stablecoins work, why traders depend on them, and what makes them a key part of successful crypto trading.
What Are Stablecoins?
Stablecoins are cryptocurrencies made to keep their value steady. Unlike Bitcoin or Ethereum, which can swing up and down in price, stablecoins are tied to things like the U.S. dollar or gold. This makes them more reliable and less risky.
For example, USD Coin (USDC) is a stablecoin pegged to the U.S. dollar. One USDC is always worth about $1, making it great for trading, payments, or just holding safely.
Stablecoins are an important part of the crypto economy. It lets you enjoy the speed and ease of crypto without worrying about big price changes. Read our in-depth guide on stablecoins here.
How are Stablecoins Different from Other Cryptocurrencies?
Stablecoins are unique because they’re designed to avoid the wild price swings typical of cryptocurrencies like Bitcoin and Ethereum.
For instance, Bitcoin has a fixed limit of 21 million coins. New coins are mined over time, but the rate decreases according to a preset algorithm. Ethereum, unlike Bitcoin, doesn’t have a supply limit. Instead, it creates new coins based on network rules and rewards for staking.
Stablecoins, on the other hand, adjust supply to maintain a stable value.
For example, fiat-backed stablecoins like USD Coin (USDC) are backed by reserves of U.S. dollars. For every USDC in circulation, there’s a dollar held in a bank, keeping its value around $1.
Crypto-backed stablecoins, like Dai (DAI), use other cryptocurrencies as collateral. To handle the ups and downs of those assets, users lock up extra value, which acts as a safety net.
Some stablecoins, like Ampleforth (AMPL), don’t use reserves. Instead, they rely on algorithms and smart contracts that adjust the supply to keep the price steady.
Because of this stability, stablecoins are ideal for things like trading, cross-border payments, and storing value. They’re also widely used in DeFi applications for lending, borrowing, and earning yields.
While other cryptocurrencies are often seen as investments, stablecoins are more about utility for everyday transactions.
Why Are Stablecoins Important in Crypto Trading?
Stablecoins are super useful for traders because they make trading easier and more stable. Instead of cashing out to fiat currencies like the U.S. dollar, which can be slow, expensive, and a hassle, you can move your funds into stablecoins like USD Coin (USDC) or Dai (DAI). This keeps you in the crypto ecosystem, avoids banking delays, and cuts down on extra fees.
Using stablecoins also helps minimize taxable events. Every time you trade back to fiat, it could trigger taxes. Stablecoins let you park your funds without that headache. Plus, they already serve as trading pairs on most exchanges.
Not all stablecoins are equal, though. Traders prefer stablecoins with transparent, audited reserves and solid reputations, like USDC. Sketchy stablecoins can be risky, as shown by the Terra crash, which caused many people to face huge losses. Blockchain and network fees are also a factor. For example, USDC on Ethereum might have higher fees than USDC on Solana, so cost-conscious traders choose accordingly.
Stablecoins help traders hedge during market swings, avoid traditional banking hassles, and even dive into DeFi activities—all without leaving the crypto space.
Risks and Limitations of Using Stablecoins in Crypto Trading
While not the biggest, regulatory uncertainty is a challenge with stablecoins. Governments are still figuring out how to regulate them, and stricter rules could make things harder for traders.
In some countries, stablecoins could even face bans or heavy restrictions. For instance, Brazil’s central bank recently proposed banning stablecoin transfers to self-custodial wallets.
Although such a ban might feel excessive, some regulatory scrutiny can be beneficial.
Why?
Because centralization and counterparty risks are some of the biggest concerns with stablecoins. Many stablecoins, like USDT and USDC, are controlled by centralized companies.
If these companies mismanage reserves or run into legal trouble, it can affect the stablecoin’s value or usability. Losing its peg, like dropping below $1, is a real risk. Poor reserve management or user panic can make this happen.
For example, Circle, the company behind USDC, faced tough questions from the SEC about its reserves and compliance when it tried to go public.
Depegging is even riskier for algorithmic stablecoins, which don’t use reserves. Instead, they rely on complicated systems to maintain their value. TerraUSD (UST) is a prime example—it collapsed entirely because of flaws in its design, causing massive losses for traders. Read the full story here.
High fees and liquidity can also be an issue. Using stablecoins like USDC on Ethereum can cost a lot in gas fees, especially when the network is busy. At the same time, less popular stablecoins might not have enough liquidity, making trades slower and more expensive.
While stablecoins are super useful, these risks mean you need to choose wisely, keep an eye on regulations, and diversify your holdings to avoid surprises.
Best Stablecoins for Crypto Trading
When picking a stablecoin for trading, look at liquidity, transparency, and regulatory compliance. The best stablecoins should be reliable, easy to trade, and suit your risk preferences. Here’s a quick look at the top stablecoins for crypto trading:
1. Tether (USDT): USDT is the largest stablecoin by market cap, sitting at around $138 billion. It dominates the market with a 69.9% share and daily trading volumes of over $190 billion. Its high liquidity makes it perfect for quick trades. However, Tether has faced scrutiny over reserve transparency, so it may not be the best choice for risk-averse traders.
2. USD Coin (USDC): USDC, with a $40.78 billion market cap, is known for its transparency and regular audits. It’s issued by Circle, a company focused on regulatory compliance, making it a trusted option. USDC also has high liquidity, with daily volumes of $11.68 billion, and appeals to traders seeking a safe and compliant stablecoin.
3. Dai (DAI): DAI is a decentralized stablecoin with a $5.37 billion market cap. It’s fully transparent, as all its operations and collateral are visible on the blockchain. While its liquidity is lower than USDT or USDC, DAI’s decentralized nature attracts traders who value decentralization over central control.
Read our list of best stablecoins for more options here.
FAQ
How do stablecoins make money?
Stablecoins make money in a few ways. Fiat-backed stablecoins like USDC or USDT hold reserves in accounts that earn interest, such as government bonds. The companies behind these stablecoins keep the interest as profit.
Algorithmic stablecoins work differently. They use systems to balance supply and demand and sometimes charge fees for transactions or protocol usage.
Some issuers also offer extra services, like trading or lending, which generate fees.
Is it safe to keep money in stablecoins?
Keeping money in stablecoins can be safe, but it depends on the type of stablecoin and how it’s managed. Fiat-backed stablecoins like USDC or USDT are usually safer because they’re backed by reserves and often audited. Still, their safety depends on how reliable and transparent the issuer is.
Decentralized stablecoins like DAI are backed by cryptocurrencies and run on smart contracts. While they’re transparent, they can still face risks like technical flaws. Algorithmic stablecoins are riskier because they rely on complex systems, and some, like TerraUSD (UST), have failed in the past.
To stay safe, choose trusted stablecoins with clear reserve policies. Avoid putting all your money into one, and keep an eye on any regulatory changes.
Which is the safest stablecoin?
USD Coin (USDC) is widely considered one of the safest stablecoins. It’s backed 1:1 by fiat reserves, with regular audits and a strong focus on transparency and regulatory compliance.
Tether (USDT), on the other hand, is highly liquid and popular but has faced criticism for not always being clear about its reserves, making it slightly less trusted by some.
Lastly, Dai (DAI) is a decentralized option that is fully transparent on the blockchain, but its safety depends on the stability of the crypto assets backing it.
Overall, USDC stands out for its clear reserves and audits, making it a top choice for safety.
Which is better, USDT or USDC?
Choosing between USDT and USDC depends on your needs.
USDT (Tether) offers the highest liquidity and is available on almost all platforms, making it great for fast trades. However, it has faced criticism for a lack of transparency about its reserves.
USDC (USD Coin) is more transparent, with regular audits and strong regulatory compliance. While slightly less liquid than USDT, it’s trusted by institutions and risk-averse traders.