Stablecoins and cryptocurrencies are both digital assets built on blockchain technology that serve different purposes.
Major cryptocurrencies like Bitcoin and Ethereum are known for their price volatility and investment potential.
For some years, stablecoins gained prominence as a safe harbour for crypto traders. But now, they’re an increasingly important economic tool for the 21st century.
In this guide, we’ll explain the core differences between stablecoins and cryptocurrencies, their use cases, and risks.
Key Takeaways
- Stablecoins are designed to maintain stable value, such as a 1:1 peg to the U.S. dollar.
- Cryptocurrencies are extremely volatile and are primarily used for speculation and as a store of value.
- Both types of assets run on blockchain technology but serve different purposes.
What Are Stablecoins?
Stablecoins are a type of cryptocurrency designed to maintain a preset, consistent value.
These digital assets ‘peg’ their value to a common stable asset, e.g., U.S. dollars and other major fiat currencies. In addition, some stablecoins are backed by commodities like gold or are algorithmically stabilized.
Stablecoins aim to combine the benefits of blockchain technology, such as cheap, fast transactions, with the price stability of fiat money.
Long-running stablecoins like Tether (USDT) initially provided crypto traders a safe harbour for their wealth, allowing them to trade out of volatile crypto assets whenever they needed to.
But now, they’re moving beyond the crypto markets and are increasingly used in transactions by everyday users and major financial institutions like banks.
Popular stablecoins include USDT, Circle’s USDC, PayPal’s PYUSD, and MakerDAO’s DAI, which use different mechanisms to maintain their peg.
Some are backed entirely by U.S. dollar reserves; others are made up of a basket of cash, crypto, or other collateral equivalents.
Stablecoin Use Cases
Since their early inception, stablecoins have been used as a bridge between the traditional financial and crypto worlds.
Over time, they emerged as a popular tool for cross-border payments and remittances, as they could be sent at high speeds for incredibly low costs around the world.
The cost of sending $100 in USDT averages between $0.05 and $2.00, depending on the network, and it’s usually complete in less than a minute.
Using a traditional money transfer company like Western Union, a $100 transfer can incur fees up to $15, not counting hidden extra fees if you’re converting to a local currency. This process can take days.
Other use cases also include:
- Everyday payments & e-commerce: Business, platforms, and even some governments are accepting stablecoins directly for goods, services, and other common payments.
- Real-world asset (RWA) tokenization: Stablecoins are commonly used as the settlement currency when trading tokenized real estate, bonds, or other blockchain-based assets.
- Payroll and cross-border salaries: Companies that are remote-first are increasingly turning to stablecoin payouts for employees or contractors.
What Are Cryptocurrencies?
Cryptocurrencies are digital assets that are typically designed as mediums of exchange or a store of value.
They usually exist on decentralized networks, allowing for peer-to-peer (P2P) trade and activity that no single entity, company, or government can control.
Furthermore, cryptos come in several shapes and sizes with different use cases and utility.
Bitcoin (BTC) is the first and most popular cryptocurrency. It was created as a relatively simple P2P electronic cash system.
Ethereum expanded on the concept with smart contracts, allowing developers to build applications on the network.
Users need to utilize Ethereum (ETH) tokens to pay transaction fees (gas) when interacting with smart contracts.
Volatility is a key characteristic of cryptocurrencies. They frequently fluctuate in value based upon supply, demand, market sentiment, as well as regional and global economic factors.
Cryptocurrency Use Cases
Typical cryptocurrencies are used for investment and speculation. Over the years, millions of people worldwide have bought and held Bitcoin in the hope that its value will rise and give them a profit.
For others, cryptos are a great store of value and are digital alternatives to traditional assets like gold.
Additionally, crypto powers the decentralized finance (DeFi) space. Here, they’re used for borrowing, lending, and other activities without the need for traditional financial institutions and intermediaries.
Increasingly novel applications for cryptocurrencies have emerged, including rewards/payouts for content creators, playing Web3 games, and customer loyalty schemes.
Other use cases include:
- Governance: With decentralized organizations (DAOs), governance tokens allow holders to vote on proposals and influence a project/ecosystem’s direction.
- NFT creation and trading: Cryptos are used to mint and trade crypto collectibles, virtual land, and other unique assets.
- Decentralized Identity: Some projects use crypto to create unique and verifiable digital identities or issue credentials on the blockchain.
Stablecoins vs Cryptocurrencies: Key Differences
Here’s a comparison between the main features of stablecoins and cryptocurrencies:
| Feature | Stablecoin | Cryptocurrency |
| Price Stability | Designed to maintain a stable value | Highly volatile |
| Primary Purpose | Payments, trading, value transfer | Investment, speculation, store of value |
| Use Cases | Trading pairs, remittances, DeFi, payouts | Speculation, DeFi, long-term holding |
| Backing | Typically backed by reserves and/or assets | Usually none (decentralized) |
| Regulation | Increasingly regulated (notably in the EU and U.S.) | Varies widely depending on jurisdiction. |
| Issuer | Usually, a company or decentralized protocol | Typically none (decentralized) |
Stablecoin Risks
In 2022, the TerraUSD (UST) algorithmic stablecoin collapse caused one of the biggest crypto market collapses in history, erasing $40 billion from the market overnight.
Its failure bankrupted several major lending firms like Three Arrows Capital (3AC) and Celsius, among other casualties.
In 2023, Circle’s USDC suffered a depeg incident when the firm revealed it signicant reserves (roughly 8%, or $3.3 billion) in the failing Silicon Valley Bank (SVB) after a bank run. It was the third-largest bank failure in U.S. history.
SVB’s losses triggered a large panic sell-off, dropping USDC to roughly $0.87.
Though it wasn’t as catastrophic as the TerraUSD debacle, the contagion was felt across the markets, and it was a signal that regulators and legislators needed to mitigate these weaknesses.
Above and Beyond
In short, stablecoins are aiming to operate similarly to fiat currency whilst retaining all the speed, cost, and accessibility benefits that come with blockchain technology.
Stablecoins are aiming to have everyday utility on par with fiat currency. This means stablecoins are held to a higher standard of regulatory scrutiny, as the overall market and number of stablecoin issuers grow.
Evidently, due to the size of stablecoin markets, external factors such as banking errors or geopolitical tensions can place strain on their stability.
At present, regulators around the world are working to bring in policies that mitigate these risks and, ideally, unleash the full potential of stablecoins.
As more stablecoin issuers enter the market and regulation continues to evolve, stablecoins are likely to play an ever-increasing role in our day-to-day lives.
