The market drops 15% in a week. You decide to lock in part of your gains and sell your altcoins for USDC, telling yourself you are now "safe", just like holding cash in a bank account. One Saturday morning in March 2023, you open your app and discover that your USDC is trading around $0.88.
This scenario is not hypothetical: it is exactly what happened after the collapse of Silicon Valley Bank. Stablecoins have become the backbone of the crypto market, but they are not euros, not dollars, and not insured bank deposits. Understanding how they work means understanding where their risk hides.
What Is a Stablecoin?
A stablecoin is a crypto asset designed to maintain a stable value relative to a reference, most often the US dollar, sometimes the euro or gold. One USDT or USDC aims to be worth $1, one EURC aims to be worth €1. This link to the reference is called the "peg".
Technically, a stablecoin is a token issued on one or more blockchains (Ethereum, Tron, Solana, and others). It moves like any other crypto: you can send it to another wallet in seconds, trade it on an exchange, or use it in a decentralized protocol. The difference is that it does not try to gain value: it tries to stay at 1.
The stablecoin market has been worth more than $200 billion since 2025, largely dominated by two players: Tether (USDT), launched in 2014, and Circle (USDC), launched in 2018. The real question is what actually guarantees that your token will still be worth $1 tomorrow.
The Three Main Stablecoin Models
Not all stablecoins hold their peg the same way. There are three families, with very different levels of risk.
Fiat-backed stablecoins. This is the dominant model. A centralized issuer (Tether, Circle) holds reserves in dollars or euros, mainly cash and short-term Treasury bills, and issues one token for each unit held. In theory, you can always redeem 1 USDC for $1 with the issuer (in practice, direct redemption is reserved for institutional clients, while retail users go through exchanges). USDT, USDC, and EURC belong to this category. Their strength depends entirely on the quality of the reserves and the honesty of the issuer.
Crypto-collateralized stablecoins. DAI, created by MakerDAO (since rebranded as Sky), is the historical example. To generate $100 of DAI, a user must lock crypto worth more in a smart contract, for example $150 of ETH. If the collateral value falls too far, the position is automatically liquidated to protect the peg. This model is more transparent (everything is visible on-chain) but depends on the soundness of the code and the quality of the collateral, which today also includes a share of USDC and real-world assets.
Algorithmic stablecoins. Here there is no sufficient reserve: an algorithm adjusts supply to maintain the price, usually through a second token. The textbook case is TerraUSD (UST). Its peg relied on a swap mechanism with the LUNA token and on yields of around 20% offered by the Anchor protocol. In May 2022, massive withdrawals triggered a spiral: UST lost its peg, LUNA was minted in astronomical quantities to try to defend it, and both collapsed within days. Tens of billions of dollars in value vanished. Since then, "algorithmic stablecoin" has become a synonym for extreme caution.
Why Stablecoins Have Become Essential
Stablecoins are the most used cryptos day to day, far more than Bitcoin for trading. Several reasons explain their central role.
A universal trading pair. On most exchanges, cryptos trade against USDT or USDC rather than against the dollar itself. This position gives them exceptional liquidity: they are often the assets with the highest daily trading volumes in the entire market.
An on-ramp and off-ramp. Stablecoins act as a bridge between the banking system and the blockchain. They let you move value between platforms 24/7, without depending on bank transfer hours.
The fuel of DeFi. Lending, borrowing, liquidity pools: most of decentralized finance runs on stablecoins, because they provide a stable unit of account to calculate interest and collateral.
A temporary shelter from volatility. When the market heads sharply lower, moving part of your portfolio into stablecoins protects you from volatility without leaving the crypto ecosystem. It is convenient, as long as you do not confuse "stable" with "risk-free".
Stablecoin Risks You Should Not Underestimate
Depeg risk. A stablecoin can break away from its reference. The USDC episode of March 2023 illustrates this: Circle had about $3.3 billion of reserves stuck at Silicon Valley Bank when it failed. Over one weekend, the market doubted, and USDC fell to around $0.88 before regaining its peg once US authorities guaranteed the deposits. DAI, partly backed by USDC, followed the same path. A stablecoin backed by real reserves can wobble too.
Issuer risk and reserve transparency. With a fiat-backed stablecoin, you are trusting a company. Does it publish regular attestations? From which firm? Are its reserves made of liquid assets or riskier investments? Tether was long criticized on this front and was fined in 2021 by the US CFTC for misleading statements about its reserves. Things have improved since, but an attestation is not a full audit.
Regulatory risk. A stablecoin can be frozen, restricted, or delisted from a platform overnight depending on how laws evolve. Centralized issuers also have the technical ability to freeze addresses, which they regularly do at the request of authorities.
Custody risk. Leaving your stablecoins on an exchange adds counterparty risk on top of issuer risk. If the platform goes bankrupt, as during the FTX collapse, your stablecoins are locked up like everything else. That is the whole point of the principle Not your keys, not your crypto.
What MiCA Changes for Stablecoins in Europe
Since June 30, 2024, the European MiCA regulation has strictly governed stablecoins. It distinguishes two categories: EMTs (e-money tokens), backed by a single official currency such as the euro or the dollar, and ARTs (asset-referenced tokens), backed by a basket of assets or currencies.
To offer an EMT to the public in the European Union, the issuer must be authorized as a credit institution or an electronic money institution. It must hold segregated reserves, a minimum share of which must be deposited with banks, guarantee a right of redemption at any time and at par, and publish a white paper. Issuers are also prohibited from paying interest to holders.
The practical consequence: Circle obtained authorization in France in 2024 for USDC and EURC, while Tether did not apply for USDT. Several regulated platforms therefore removed or restricted USDT for their European customers between late 2024 and early 2025. This shift has deep effects on the balance of the market, which we analyze in our article on how Europe faces a stablecoin model shock.
How to Choose and Use a Stablecoin
There is no perfect stablecoin, but a few criteria help limit the risks.
Check the regulatory status. As a European resident, favoring a MiCA-compliant stablecoin protects you from a sudden delisting on your platform and gives you a legal framework if something goes wrong.
Look at the reserve composition. A serious issuer publishes monthly attestations detailing its assets. Be wary of high yields: a stablecoin that "pays" 15% a year is necessarily taking risks somewhere.
Pick the right currency. If you think in euros, holding dollar stablecoins exposes you to the EUR/USD exchange rate. A euro stablecoin like EURC removes that risk, at the cost of lower liquidity.
Diversify and secure. Spreading your stablecoins across several issuers limits the impact of an isolated depeg. For large amounts held over time, a cold wallet removes the exchange risk (but not the issuer risk).
Finally, remember that your stablecoins are part of your portfolio: tracking their share and real value in a tool like Exceefy keeps you from losing sight of an exposure that can become significant.
FAQ
Is a stablecoin risk-free?
No. A stablecoin is designed to be stable, not guaranteed. It is not covered by bank deposit insurance and can lose its peg if there are doubts about its reserves, a technical problem, or a regulatory decision. Stablecoins backed by high-quality reserves are much sturdier than algorithmic models, but zero risk does not exist.
What is the difference between USDT and USDC?
Both are dollar-backed stablecoins issued by private companies. USDT (Tether) is the largest by market cap and widely used outside Europe. USDC (Circle) is considered more transparent about its reserves and holds a MiCA authorization, which makes it the most accessible option on regulated platforms in Europe.
Can you earn interest on stablecoins?
Yes, through DeFi protocols or some platforms, but that yield is never free. It comes from lending your funds to borrowers or from strategies that carry counterparty, smart contract, or liquidation risk. The TerraUSD story is a reminder that an abnormally high yield is often the first warning sign.
Is converting crypto into stablecoins taxable?
It depends on your country. In France, for example, a swap between crypto assets, stablecoins included, is in principle not a taxable event: tax applies when you convert to euros or buy goods and services. In many other jurisdictions, including the US and the UK, crypto-to-crypto trades are taxable. Check the rules that apply to you with a professional.
