Stablecoins

Infrastructure, not an investment

A stablecoin is a crypto-asset designed to keep its value stable against the dollar or the euro. In practice it is a private issuer's digital promise: you own a token that is meant to be worth one dollar. The promise holds only as long as the reserves are sufficient, and that is the starting point of the whole analysis. A stablecoin is not an alternative investment but a tool that every crypto investor comes across. You don't need to own it as a source of return, but you do need to understand it.

This starting point changes the whole way you assess a stablecoin. You shouldn't compare it with stocks or bonds as an investment. Assess it as infrastructure: how reliably it holds its nominal value and how certainly it can be redeemed. Every crypto investor comes across stablecoins at the latest as an intermediate unit in trading, so you don't need to own them as a source of return. But you do need to understand the mechanism, because it carries real counterparty and reserve risk.

What stablecoins are used for

• Quote currency for trading: an intermediate unit between crypto-assets without converting to fiat. According to the ECB, ~80% of crypto trading goes through stablecoins.
• Temporary holding: a waiting place when you exit volatile crypto. A large open position is a structural risk, not a neutral substitute for cash.
• International transfers: moving nominal value on-chain in minutes, around the clock.
• DeFi and tokenized markets: a unit of account and collateral in lending and trading protocols, and a settlement currency for tokenized securities.

These uses explain why the total value of stablecoins has grown to hundreds of billions without them being an “investment”. They are the settlement and liquidity layer of the crypto market: according to the ECB, about 80% of crypto trading goes through them. This central role is also their systemic risk. If a large stablecoin wobbles, it doesn't just bring itself down but also all the trading and DeFi structures built on top of it.

Four types, four risk profiles

The nominal goal is the same, but the mechanism behind the stability differs, and that is exactly what decides how a stablecoin behaves under stress:

The difference between the types is not academic, because it decides the behavior exactly when it matters: under stress. USDC, backed by fiat reserves, can be redeemed from transparent government securities, while an algorithmic token relies on a market mechanism that can fail in a death spiral. “Stablecoin” as a general term is therefore misleading: the word promises stability, but the quality of that stability varies entirely with the mechanism behind the nominal value.

Reserve analysis: the most important skill

Don't look only at the market price. Three questions:

• Reporting: how often and how visibly? (Circle: weekly disclosure plus monthly third-party assurance.)
• Reserve contents: cash and short-term government securities are different from longer, less liquid instruments; under stress, liquidity is what counts.
• Attestation vs. audit: an attestation is useful, but it is not the same as an ongoing audit.

The essential question is not whether the price stays at one dollar on a normal day, but

what holds up the nominal value when the market is under stress

.

The core of reserve analysis is to separate the existence of the backing from its quality and redeemability. A reserve can exist on paper but be tied up in instruments that can't quickly be turned into cash at exactly the moment when everyone wants to redeem at once. That is why cash and short-term government securities are different from longer or less liquid holdings: under stress, what counts is how quickly the reserve turns into payments, not its book value on a calm day.

Three key risks

• De-pegging and runs: if confidence in redeemability breaks, everyone tries to get out at once and the price detaches from the nominal value, even if the reserves are in order.
• Regulatory fragmentation: the token moves globally, but legal protection does not. The same product can be supervised in one country and loosely regulated in another.
• Links to the financial system: large reserves in short-term government securities tie stablecoins to traditional finance, which is why central banks watch them closely.

These three risks also feed each other. Regulatory fragmentation can trigger uncertainty, uncertainty can start a run, and a run on large fiat-reserve tokens can force government securities to be sold all at once, which ties the crisis to the traditional financial system. This link is exactly why central banks are watching stablecoins ever more closely: they have grown so large that their stability is no longer just an internal matter for the crypto market.

MiCA changed the landscape in Europe

MiCA became fully applicable on 30 Dec 2024. ART and EMT issuers need authorization, and detailed requirements now apply to reserves, governance and redemption. The most important investor protection: an EMT holder has the right to redeem the token at nominal value from the issuer at any time, without an extra fee. USDC and EURC are MiCA-compliant EMTs; services for non-compliant products had to be wound down or limited to sell-only mode. MiCA makes the risks better defined and easier to analyze, but it does not remove redemption, reserve or issuer risk.

For investors, the practical significance of MiCA is that it makes the risks more clearly defined and comparable, not nonexistent. An EMT holder's right to redeem at nominal value is real protection, and the authorization requirement weeds out the weakest players. Even so, reserve, redemption and issuer risk remain. MiCA moves the focus from the question “is this legal” to the question “how is this supervised and what rights do I have”, which is exactly what an investor needs to be able to read.

Not a yield product

A stablecoin by itself produces nothing except the stability of its nominal value. If a yield promise is built on top of it, the yield comes from somewhere else: lending, leverage, providing liquidity or carrying counterparty risk. When a stable nominal value is combined with a double-digit yield promise, it creates the illusion of “dollar stability + high interest”. In reality it is a completely different risk structure. Owning a stablecoin and using it in a yield strategy are two different things.

This distinction is the most dangerous blind spot in the stablecoin world. When “dollar stability” is combined with double-digit interest, many people assume they are getting a risk-free deposit with a high return, even though in reality the return comes from lending, leverage or carrying counterparty risk, all of which can collapse. Terra's Anchor (~20%) was exactly this kind of structure. Rule of thumb: the higher the yield promise on top of a stable token, the bigger the hidden risk. A stable nominal value and a high return almost always contradict each other.

A five-step check before use

• Issuer and regulation: who issues it, which MiCA category (EMT or ART), and is there a valid authorization?
• Reserves and transparency: where are the reserves, who verifies them, how often are they reported and what do they contain?
• Right of redemption: who is it open to, on what schedule and at what cost?
• Usability: on which blockchains, and what are the chain-specific costs (USDC on Ethereum costs more than on Solana)?
• Quality of liquidity: trading volume and bid–ask spread on the largest exchanges?

The Terra collapse: the lesson

The algorithmic UST (Terra) lost about $40 billion in market cap in two days in May 2022. It relied on circularity (UST ↔ LUNA): stability was based on a mechanism between two tokens without full reserve backing. When confidence broke, a death spiral followed and there was no mechanism to restore the peg.

Two lessons have lasted. First, a high “return” is always a signal of some other risk: Terra's Anchor protocol promised a ~20% return, which should have raised suspicion, not excitement. Second, market cap says nothing about the quality of stability. A large and popular stablecoin can be structurally fragile. Stability is a promise that holds only as long as the mechanism behind it withstands stress.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.