What is a stablecoin?
Written by an ex-institutional trader. What a stablecoin is, how it holds its peg (shown with a diagram), the different types, what they are used for, and the risks, including what happens when a peg breaks.
Direct answer
A stablecoin is a cryptocurrency designed to hold a steady value, almost always pegged to a stable asset like the US dollar, so one coin is worth about US$1. It combines the speed and borderless transfer of crypto with the price stability of regular money. Stablecoins like USDT and USDC are the main way traders park funds, move money between exchanges, and access decentralised finance without converting back to cash.
How well a stablecoin holds its peg depends entirely on what backs it. The safest are fully backed by real cash and short-term government debt held in reserve, so each coin can be redeemed for a real dollar. Riskier designs rely on other crypto or on algorithms, and these have failed dramatically before, most infamously when TerraUSD collapsed to near zero in 2022. A stablecoin is only as stable as its backing, so the type matters enormously.
What a stablecoin is
A stablecoin is a cryptocurrency designed to hold a steady value, almost always pegged to a stable asset like the US dollar, so one coin is worth about US$1. It is the bridge between volatile crypto and regular money: you get the speed, 24/7 availability and borderless transfer of crypto, with the price stability of a dollar.
The two largest, USDT (Tether) and USDC, are dollar-pegged and used across the whole crypto system. Stablecoins exist because moving in and out of actual cash is slow and costly, so traders and apps needed a dollar-like asset that lives natively on the blockchain.
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How the peg works
The whole point of a stablecoin is to stay flat while the rest of crypto swings. The diagram shows the idea: a stablecoin tracks a roughly horizontal line near US$1, while a coin like Bitcoin moves up and down sharply over the same period.
What keeps the gold line flat is the backing. For a fully-backed stablecoin, the issuer holds one real dollar of reserves (cash and short-term government debt) for every coin, so anyone can redeem a coin for a dollar. That redeemability is what anchors the market price at US$1. If the backing is weak or doubted, the anchor weakens and the peg can slip.
The types
Not all stablecoins are equally safe, because they hold the peg in very different ways:
- Fiat-backed (e.g. USDC, USDT): backed one-to-one by real cash and short-term bonds in reserve. The simplest and generally safest model, as long as the reserves are real and audited.
- Crypto-backed (e.g. DAI): backed by a surplus of other cryptocurrencies locked as collateral, over-collateralised to absorb crypto's volatility. More decentralised, more complex.
- Algorithmic: no real backing; code and incentives try to manage supply to hold the peg. The riskiest by far, and the type behind the most catastrophic failures.
The rule of thumb: the more real, transparent assets behind a stablecoin, the more trustworthy the peg.
What they are used for
Stablecoins are the plumbing of crypto. The main uses:
- Parking funds between trades without converting back to cash, avoiding volatility while staying in the market.
- Moving money between exchanges and wallets quickly and cheaply, any time.
- Accessing decentralised finance, where stablecoins are the dominant unit for lending, borrowing and trading.
- Cross-border transfers, sending dollar-equivalent value internationally without the banking delay.
For most Australian users, the everyday use is simply holding a steady-value asset on an exchange between trades.
The risks
A stablecoin is only as stable as its backing, and that is the whole risk:
- De-pegging. If reserves are inadequate or confidence drops, the price can fall below US$1. Algorithmic designs can collapse entirely, as TerraUSD did in 2022.
- Issuer and counterparty risk. You are trusting the issuer to actually hold and honour the reserves.
- No deposit guarantee. Unlike bank deposits, stablecoins carry no government protection.
- Yield traps. Unusually high yields offered on a stablecoin almost always signal hidden risk. Treat them with deep suspicion.
Used sensibly, well-backed stablecoins are a genuinely useful tool, but they are not a risk-free dollar. When you are ready to buy crypto, including stablecoins, use a reputable AUSTRAC-registered exchange, and remember swapping into or out of a stablecoin is still a taxable event.
Popular Australian crypto exchanges
All three are AUSTRAC-registered Australian exchanges. Crypto is volatile; only invest what you can afford to lose.
This is general information, not financial advice. Last reviewed: 2026-06-02.
Frequently asked questions
What is a stablecoin in simple terms?
A stablecoin is a cryptocurrency built to hold a steady value instead of swinging like Bitcoin. Most are pegged to the US dollar, so one coin stays worth about one US dollar. It gives you the speed and 24/7 borderless transfer of crypto without the wild price moves, which is why traders use stablecoins to hold funds between trades and move money around the crypto system. The best-known are USDT (Tether) and USDC.
How does a stablecoin keep its value?
It depends on the design. Fiat-backed stablecoins like USDC hold real cash and short-term government bonds in reserve, one dollar of assets for each coin, so the coin can always be redeemed for a real dollar, which anchors the price. Crypto-backed stablecoins hold a surplus of other cryptocurrencies as collateral. Algorithmic stablecoins use code and incentives to manage supply with no real backing, which is the riskiest approach. The stronger and more transparent the backing, the better the peg holds.
Are stablecoins safe?
The safest, fully fiat-backed and regularly audited stablecoins are relatively low-risk for short-term use, but no stablecoin is risk-free. The peg can break if reserves are inadequate or doubted, the issuer carries counterparty risk, and regulation is still developing. Algorithmic stablecoins are genuinely high-risk and have collapsed completely before. Treat well-backed stablecoins as a useful tool rather than a guaranteed dollar, do not assume any stablecoin is as safe as a bank deposit, and be very wary of unusually high yields offered on them.
What is the difference between USDT and USDC?
Both are US-dollar-pegged, fiat-backed stablecoins and the two largest by far. USDT (Tether) is the most widely used and most liquid, especially for trading, but has historically faced more questions about the transparency of its reserves. USDC (issued by Circle) is generally seen as more transparent and regulation-friendly, with regular attestations of its reserves. For most users the practical difference is minor; both aim to stay at US$1, and which one an exchange supports often decides which you use.
What happened with TerraUSD?
TerraUSD (UST) was an algorithmic stablecoin that tried to hold its US$1 peg through a code-based mechanism with a sister token, rather than real reserves. In May 2022 confidence cracked, the mechanism failed, and UST collapsed from US$1 to near zero within days, wiping out tens of billions of dollars. It is the clearest warning that a stablecoin is only as stable as its backing: an algorithmic peg with no real assets behind it can unravel extremely fast. It is why most users now favour fully-backed stablecoins.
Do you pay tax on stablecoins in Australia?
Generally yes, the same capital-gains rules apply. The ATO treats stablecoins like other crypto, so swapping crypto into a stablecoin, or a stablecoin into another coin, is a disposal and a capital-gains-tax event, even though the stablecoin's value barely moves. Because the price is steady the gain or loss is usually small, but the transaction still needs to be recorded. Using crypto tax software to track stablecoin movements saves a lot of manual work. See the crypto tax guide for detail.
