Understanding the Risks of Stablecoins: A Guide for Crypto Investors in 2025

Stablecoins, designed to offer price stability in the crypto market, have faced failures like the collapse of TerraUSD and temporary de-pegs of USDC. Their safety depends on their design, backing, and control. Most stablecoins fall into four categories: fiat-collateralized, crypto-collateralized, algorithmic, and hybrid models. Fiat-collateralized stablecoins, like USDC and USDT, are backed by traditional assets and offer a strong peg in normal market conditions, while crypto-collateralized options and algorithmic stablecoins are more decentralized but riskier. Investors must consider the risks and benefits of each type of stablecoin when deciding whether to use them in their portfolios.

Stablecoins, designed to offer price stability in the crypto market, have faced failures like the collapse of TerraUSD and temporary de-pegs of USDC. Their safety depends on their design, backing, and control. Most stablecoins fall into four categories: fiat-collateralized, crypto-collateralized, algorithmic, and hybrid models. Fiat-collateralized stablecoins, like USDC and USDT, are backed by traditional assets and offer a strong peg in normal market conditions, while crypto-collateralized options and algorithmic stablecoins are more decentralized but riskier. Investors must consider the risks and benefits of each type of stablecoin when deciding whether to use them in their portfolios.

Fiat-collateralized stablecoins, such as Tether (USDT) and USD Coin (USDC), are backed by traditional assets like cash, short-term government bonds, and commercial paper. These assets are held in reserve and are used to maintain the stablecoin's peg to the US dollar. USDT, launched in 2014 by Tether Limited, was the first stablecoin to gain widespread traction in crypto markets. It is available on more than a dozen blockchains and has a market capitalization of over $80 billion. However, USDT has faced regulatory scrutiny due to its lack of regular, independent audits and questions about its reserve composition [1].

USDC, launched in 2018 by Circle, is often favored by institutions and regulators due to its audited reserves and US-based issuer. USDC is backed by a dedicated SEC-regulated money market fund managed by BlackRock. It is available on more than 18 blockchains and has a market capitalization of over $40 billion. USDC's transparency and regulatory compliance make it a preferred choice for institutional investors [1].

Both USDT and USDC have faced temporary de-pegs from the US dollar, but these have been brief and often corrected within hours. USDT's de-pegs were typically in response to market-wide panic events or scrutiny around its reserve composition, while USDC's de-peg in March 2023 was due to the collapse of Silicon Valley Bank (SVB), where Circle held over $3 billion in reserves. Since then, Circle has strengthened reserve disclosures and banking diversification [1].

In conclusion, fiat-collateralized stablecoins like USDT and USDC offer a strong peg to the US dollar and are widely used for payments, transfers, and asset protection. However, investors must consider the risks and benefits of each stablecoin when deciding whether to use them in their portfolios. While USDT has a larger market capitalization and broader adoption, USDC's transparency and regulatory compliance make it a preferred choice for institutional investors.

References:

[1] https://crypto.com/en/university/tether-usdt-vs-usd-coin