Stablecoins: what they are and why a trader needs them

A stablecoin is a token whose price is pegged to a stable asset. Almost always that's the US dollar. One token should be worth one dollar, and the whole design is built around keeping that number from swinging back and forth the way bitcoin or altcoins do.

To put it plainly, if you want to understand a stablecoin in the simplest terms, picture an exchange counter that always swaps your crypto for a digital dollar at the same rate. Bitcoin can drop 8% in a single day, a mid-cap altcoin easily loses 20% over the same 24 hours. Holding capital through that kind of chop is uncomfortable when you just need to sit out a market move or move money between exchanges. This is where the stablecoin comes in.

I've tested this from my own experience plenty of times. When the market turns sharply down, the first thing most traders do is move into USDT or USDC. Not into fiat, because a withdrawal to a card takes time and costs a fee, but specifically into a stablecoin. That gives you a reaction speed a bank transfer simply can't.

Why you need them: the dollar peg

The dollar peg solves a specific problem. It gives the market a unit of measurement that doesn't confuse itself. When you trade the BTC/USDT pair, bitcoin's value in dollars is visible directly, because USDT is almost always worth a dollar.

Without stablecoins, a trader would have to keep withdrawing profit into fiat through a bank just to lock in the result of a trade. That's slow, expensive and often tangled up with account freezes over compliance. The stablecoin removes that step entirely.

There's a less obvious layer of usefulness too. Stablecoins have become the main unit of account across all of crypto. Most pairs on exchanges are quoted in USDT or USDC, not in BTC. Liquidity concentrates around dollar pairs, and that's where the bulk of trading volume goes.

Take a concrete example. A trader holds $10,000 in USDT on an exchange and goes long ETH at $3,200. Two hours later the price is up to $3,350, the position closes in profit. The profit settles straight into USDT, whose price won't budge a cent no matter what happens to ether. Try pulling off the same thing while keeping your reserve capital in ether itself, and part of the profit from a good trade gets eaten by the volatility of the reserve.

The difference is especially clear on accounts running several open positions at once. If you keep your entire free balance in BTC or ETH, any market drawdown of 5-6% instantly shrinks the margin available for new trades, even if those specific positions have nothing to do with the falling asset. Using a stablecoin as the base currency of the account removes that hidden dependency and leaves your available capital exactly what it was yesterday.

Types of backing: fiat, crypto, algorithmic

Not all stablecoins are built the same way. There are three basic backing models, and which one you're looking at determines the real risk of the asset.

Fiat-backed stablecoins. The issuing company holds real dollars or US Treasuries in a bank account, and every token issued is matched by a corresponding reserve. That's how USDT and USDC work. The upside of the model is its simplicity and predictability. The downside is that you have to trust the company and its auditors, and the company itself can technically freeze a specific wallet at a regulator's demand.

Crypto-backed (overcollateralized) stablecoins. Instead of dollars, the reserve holds crypto, and in a larger amount than the tokens issued. The classic example goes like this. To get 100 DAI, you need to lock up ether worth $150 or more. If the collateral price falls below the threshold, a smart contract liquidates the position automatically. There's no company here at all; everything is run by the protocol and a vote of the governance token holders.

Algorithmic stablecoins. The riskiest category of the three. Here there's no real backing at all; instead an algorithm works with a paired token that's supposed to balance supply and demand through math. That's exactly how Terra's UST was built, and exactly why it collapsed to zero in a matter of days in May 2022. We'll break this case down in detail below, in the risks section.

Each model solves the stability problem in its own way, but pays a different price for it. In one case it's trust in the issuer, in another capital efficiency, in another the algorithm's durability at the moment of a crisis.

If the basic mechanics of exchanges and API connections are still shaky for you, you can get your head around it in the free lesson from the "Trading from Scratch" course. The lesson is part of the full free playlist of five videos and walks through connecting Binance, Bybit, OKX and MEXC from zero.

A rundown of the main stablecoins

There are more than two hundred stablecoins on the market, but only three or four players carry any real weight. The combined market cap of the whole sector passed $320 billion in 2026, and almost 93% of that sum sits in just two coins, USDT and USDC.

If you go looking for a ranking like "best stablecoins 2026", the top three will almost always be USDT, USDC and the DAI/USDS pair. After that comes a long tail of niche tokens: Ethena's USDe with its delta-neutral hedging strategy, USDY and BUIDL, which look more like tokenized money market funds than a classic stablecoin, and regional coins like EURT for the euro or CNHT for the offshore yuan. For the average spot or futures trader, all this periphery barely matters, because the liquidity there is orders of magnitude smaller.

USDT (Tether): the most popular

USDT is the oldest and largest stablecoin, launched back in 2014 under the name Realcoin. Tether's market cap in mid-2026 sits around $184-190 billion. On certain days this temporarily pushes USDT into second place among all crypto assets by market cap, ahead of even ether.

Tether's reserves consist of US Treasuries worth roughly $135 billion, gold (about 116 tonnes), corporate bonds, secured loans and a small share of bitcoin. The company publishes quarterly reports through the auditor BDO Italia. This isn't a full audit in the classic sense but an attestation, meaning a confirmation of the state of the reserves as of a specific date.

USDT has a long history of small depegs. In June 2023 the price slipped to $0.996 due to a liquidity imbalance in a Curve pool. In December 2023 there was another episode tied to the wallet-freezing policy. Neither of these was catastrophic; the price recovered within hours or days.

USDT's main advantage is liquidity. On practically any exchange, in any pair, on any market, USDT will be present as the base quote currency. That's precisely why most scalpers trade in pairs with USDT, even if they formally trust USDC a little more.

USDC (Circle): the most transparent

USDC has been issued by Circle since 2018. Since June 2025 Circle itself trades on the NYSE under the ticker CRCL as a public company. That changes the picture. The issuer now has direct obligations to the SEC as a public corporation, not just to the token holders.

USDC's reserves are set up more strictly than Tether's. More than 80% of the reserve sits in the Circle Reserve Fund, registered as a money market fund managed by BlackRock, with daily public reporting on holdings through BlackRock itself. The rest is cash deposits in regulated American banks. The auditor Deloitte & Touche publishes a signed report every month under AICPA standards.

USDC's market cap in mid-2026 is around $76-80 billion, roughly half that of USDT. But USDC dominates in regulated jurisdictions. It's licensed under MiCA in the EU and complies with the requirements of the American GENIUS Act, signed in July 2025.

USDC had a loud depeg of its own. In March 2023 the bank Silicon Valley Bank collapsed, and part of Circle's reserves (about $3.3 billion) turned out to be locked up right there. USDC's price slipped to $0.87 for a few days until the FDIC stepped in and confirmed depositor protection. The peak of the panic didn't last long, but the depeg was real, not theoretical.

DAI: decentralized (and its successor USDS)

DAI was the flagship of decentralized stablecoins for a long time. There's no company behind DAI; it's backed by MakerDAO smart contracts. A user locks up ether or other crypto and receives DAI as a loan against collateral, with a collateralization ratio usually between 145% and 175%.

There's an important update worth knowing in 2026. MakerDAO renamed itself Sky Protocol back in August 2024 and issued a new token, USDS, as DAI's successor. Both tokens coexist, with one-to-one conversion through an official converter contract. But from April 2026 the major exchanges started winding down support for DAI. Binance automatically converted all users' DAI balances into USDS on April 7, 2026 and pulled DAI spot pairs. So if you come across an old screenshot or an old article about DAI, keep in mind: in 2026 the asset is in practice migrating to USDS, even though both tokens technically still exist and are backed by the same collateral pool.

DAI's market cap on its own is now around $4.6-4.7 billion, USDS has already overtaken it and sits around $7.9-8.7 billion. The backing is shared. Roughly 35-40% is tokenized US Treasuries through the RWA (real world assets) program, about a third is USDC through a special Peg Stability Module, and the remainder is ether, staked ETH and other crypto.

DAI and USDS have no wallet-freezing function on the issuer's side, because there's simply no issuer as a company. The protocol is governed by a vote of holders of the SKY token, formerly MKR. That's both an upside from a censorship-resistance standpoint and a downside in terms of reaction speed in a crisis. Decisions are made by voting, not by a lawyer's phone call to a company. In essence, DAI and USDS live by the logic of a DeFi protocol, not a centralized exchange; the article "CEX vs DEX. What's the difference" breaks down the difference between these approaches.

Comparison table

I left the BUSD row in on purpose, even though the coin is already dead. Paxos halted BUSD issuance back in 2023 at the demand of the New York regulator, and by 2024 exchanges had fully wound down support. If you come across an article somewhere calling BUSD one of the "big four" stablecoins, that's outdated information. The current trio of leaders in 2026 is USDT, USDC and the DAI/USDS pair.

Speaking of exchanges, by the way. Binance's stablecoin in the form of FDUSD (a partnership with First Digital) partly took BUSD's place after it was wound down, but by volume it still falls far short of USDT even on Binance itself.

Why a trader needs stablecoins

Now to the practical side. A trader needs a stablecoin not as an investment but as a working tool, roughly like the cash in an exchange counter's till.

Locking in profit without withdrawing to fiat

You close a trade on an altcoin pump, catch a 12% move. What next? Withdraw to fiat through a bank, wait a day or two for it to clear, pay a withdrawal fee, and then fund the exchange all over again if you decide to keep trading? That's inconvenient and slow.

Instead, the profit is locked in as USDT or USDC right on the exchange. The asset is sold, the money is in dollar equivalent, the volatility risk is off. Want to enter the next trade? The capital is already in place. Want to wait a week or two and watch the market from the sidelines? The stablecoin just sits on your balance, demanding no attention.

I usually keep part of my deposit in stables between trades. Not because I'm afraid of the market, but because I see no point in holding capital in a volatile asset when there's no quality setup to enter right now. I'd burn through the deposit faster chasing every move without pauses.

Moving between exchanges

The second practical function is moving capital around. Say a good spread, an interesting listing or just a favorable funding rate shows up on one exchange, while your capital is sitting on another venue. A transfer over the TRC-20 network or over Solana takes anywhere from a few seconds to a couple of minutes, costs pennies and doesn't need a bank as a middleman.

This is especially critical for arbitrage strategies and for two-deposit setups, where a trader keeps funds on two or three exchanges in stablecoins ahead of time, so that the moment a spread appears they can act instantly, with no delay for a transfer. A delay of 5-10 minutes in a volatile market can eat the entire potential profit. For more on the mechanics of trades like these, read the article "Crypto Arbitrage. The Complete Guide".

The withdrawal fee plays a role here too. On some networks withdrawing a stablecoin can cost 1-4% of the amount if you use a suboptimal network, and that completely kills an arbitrage spread of 1-2%. Choosing the network for a transfer, TRC-20 versus ERC-20 for example, saves real money, not abstract percentages.

Stablecoins are also heavily involved in funding on perpetual futures. A trader holds a stablecoin on spot, opens a short on futures, and collects funding rate payments every eight hours, as long as the market pays longs at the shorts' expense or the other way around. This kind of neutral position is built precisely around the stablecoin as the unit of account for both legs of the trade.

A practical example. At a funding rate of 0.03% per eight-hour period, a $20,000 position brings in roughly $6 per clearing, or about $18 a day across three payments. Seems like not much, but over the span of a month that's already more than $500 with almost no market risk, if the hedge is built carefully and isn't eaten up by exchange fees. It's the stablecoin that makes both legs of such a trade (spot and futures) comparable and easy to close at any moment.

Pairs for trading

Practically all of the liquidity volume on crypto exchanges is concentrated around pairs with USDT. BTC/USDT, ETH/USDT and so on down the whole list of traded coins. USDC is a bit more widespread on regulated venues like Coinbase and in institutional products, as well as in DeFi protocols.

In Secret Terminal, the order book and tape for pairs with USDT show the main flow of market orders. That's exactly where the activity of market makers and large players concentrates. A density level in the order book for the BTC/USDT pair forms an order of magnitude faster and more visibly than for low-liquidity pairs with exotic stablecoins, and that directly affects the quality of volume analysis when scalping.

There's a nuance. Not all stablecoins are equally liquid on all exchanges. USDC is deeper on Coinbase and in some DeFi pools, USDT is deeper almost everywhere on Asian and offshore venues. Before you pick a pair for active scalping, it's worth checking where the real turnover is actually concentrated, rather than just trading out of habit.

The difference between pairs is clearly visible on low-liquidity coins. Take a hypothetical altcoin with $2 million in daily turnover. If the pair trades against USDT, the order book depth usually lets you enter with $5-10 thousand in volume without noticeable slippage. The same coin in a pair with a less popular stablecoin might show an empty order book already at a couple thousand dollars of volume, and a market order will simply punch through several price levels. For a scalper that's the difference between a clean entry and a spread handed to the market maker.

Risks of stablecoins

The word "stable" in the name doesn't mean "risk-free." It's still an asset that can lose its peg to the dollar, either temporarily or permanently.

Depeg: what happened with UST

The most instructive lesson in crypto history, when the conversation turns to stablecoins, is the collapse of UST and LUNA in May 2022. UST wasn't a fiat-backed stablecoin, it was algorithmic, meaning it had no real dollar backing.

The mechanic was set up like this. 1 UST could always be swapped for $1 worth of LUNA, and vice versa, regardless of LUNA's current price. If UST was worth less than a dollar, arbitrageurs burned UST and minted LUNA on the difference, selling it at a profit. In theory this was supposed to hold the peg. The project additionally cranked up demand through the Anchor protocol, which paid UST depositors a yield of 19-20% a year. That kind of yield was a warning sign in itself, because it doesn't come from nowhere.

At its peak UST reached a market cap of $18 billion, and Anchor held more than $15 billion in deposits. On May 7, 2022 a large sum of UST started being withdrawn from a liquidity pool on Curve, and the price slipped to 0.985. Seemingly a trifle. But trust had already been undermined, and over the next few days a classic panic spiral kicked in. Holders mass-burned UST for LUNA, LUNA's supply shot up into the trillions of tokens, the price flew to zero. By May 13 LUNA was worth less than $0.00005, UST held around 20 cents. All told this disaster wiped out around $40-50 billion in the project's own market cap and triggered a wave of liquidations across the whole market.

In my experience it's this case that best explains the difference between "backed by assets" and "backed by an algorithm." DAI, even in a crisis, has real crypto collateral that can be liquidated. UST had nothing but the belief that LUNA would always be worth something.

Depegs happen with healthy stablecoins too, just far less destructively. USDC fell to $0.87 in March 2023 because of problems with the bank SVB, but recovered in four days, because there were real reserves behind the token, simply frozen temporarily in a troubled bank. USDT lost its peg down to $0.996-0.97 several times since 2017, and each time came back within hours.

Regulatory risks

Since 2025 the regulation of stablecoins has tightened sharply. In the US the GENIUS Act was signed in July 2025. It requires issuers to hold a 100% reserve in cash or short-term Treasuries, to disclose reserves publicly every month, and to undergo an annual audit for issuers larger than $50 billion. In the EU there's MiCA, and Tether doesn't pass those requirements, so USDT is formally excluded from part of the regulated European venues, whereas Circle got a full MiCA license.

The practical risk for a trader here is twofold. First, regulatory requirements can change the availability of a specific stablecoin on a specific exchange at any moment, as already happened with BUSD. Second, centralized issuers (Tether, Circle) have the technical ability to freeze a wallet at the demand of law enforcement. Over its history Tether has frozen more than $3 billion at blocked addresses, coordinating with law enforcement in more than 50 countries. That's not an abstract threat but a working tool that gets used regularly.

Separately, it's worth accounting for the risk of the specific network. A wallet on TRC-20 and a wallet on ERC-20 are technically different addresses even for one and the same USDT, and sending to the wrong network means losing funds with no way to get them back. Plain carelessness here costs more than any market risk.

There's also the risk of concentration at the level of the network as a whole, not an individual wallet. More than 97% of all net USDT volume is concentrated on just two blockchains, Ethereum and Tron. If one of these networks has a serious technical failure or a regulator leans on it specifically, it's not an individual user who suffers but a huge share of the entire market at once. This is a systemic risk that isn't removed by diversifying between wallets, only by diversifying between different stablecoins and different networks.

Typical trader mistakes with stablecoins

I've gathered here the things I regularly see from beginners and even from experienced traders when it comes to stablecoins.

• Keeping all free capital in one stablecoin on one exchange. If the venue has problems with withdrawals or the coin itself falls into a depeg, the entire deposit is on the line at once, not just part of it.
• Mixing up networks on withdrawal. Sending USDT to a TRC-20 address copied from an ERC-20 wallet, and the money goes for good. Before every transfer it's worth double-checking the network twice.
• Assuming that "stablecoin" equals "risk-free." A depeg has happened even to USDT and USDC, let alone UST. The word in the name isn't a guarantee, just the target the token's design is aiming for.
• Putting a large sum into a DeFi protocol for a high APY on DAI or USDS without understanding the mechanics of the smart contract and who can change the protocol's parameters by vote, and how.
• Chasing an exotic algorithmic stablecoin with a yield of 15-20% a year without asking themselves where that yield comes from. That's exactly what the Anchor and UST story looked like before the collapse.

You can go through these mistakes on live examples of the interface in the free lesson of the same course, where market analysis through the order book and clusters is shown on real trades.

When a stablecoin doesn't save you

The tool has limits to where it applies. A stablecoin protects against the price volatility of an asset, but not against problems with the exchange or protocol itself. If a venue freezes withdrawals due to bankruptcy or regulatory claims, a balance in USDT or USDC on its accounts becomes inaccessible exactly like a balance in bitcoin. A depeg isn't always short-term either: UST never recovered at all, and holders who waited for a "bounce" lost everything. Finally, a stablecoin doesn't protect against smart-contract risk in DeFi, if the protocol where DAI or USDS is sitting gets exploited. In that situation a formally "stable" asset can lose its value along with everything else that was in the same contract. For more on how to minimize risks like these and not get caught by typical scam schemes, we covered it in the article "How to Protect Your Deposit from Scams".

Which stablecoin is more reliable

There's no clear-cut winner, because "reliability" depends on which risk you're willing to accept. USDC wins on reserve transparency and regulatory status. A monthly report from Deloitte, an SEC registry, a public issuing company. USDT wins on liquidity and availability on almost any venue, but the reporting is weaker and there are more depegs in its history.

DAI and its successor USDS give you decentralization and no wallet freezing, but in exchange carry smart-contract risk and the risk of governance decisions through voting, which is slower than a corporate board's decision in a crisis moment.

For active trading and scalping, most people keep their main capital in USDT simply because of market depth. For long-term storage of large sums or for settlements with institutional partners, USDC is more often the choice. Algorithmic models like UST, if they turn up anywhere in 2026 at all, should be treated as a high-risk speculative asset, not as a substitute for money.

If you sum up the list of stablecoins by risk type, it comes out like this. Issuer and freeze risk is carried by USDT and USDC. Smart-contract and collateral-volatility risk is carried by DAI/USDS. The risk of going fully to zero is carried by algorithmic models with no real backing. Three different risks, three different behavior scenarios in a crisis.

In practice, many traders and funds don't pick one single stablecoin but hold a position across several at once. Part of the capital in USDT for liquidity, part in USDC for reserve transparency, and a small share in USDS for DeFi strategies with yield through the Sky Savings Rate. This kind of split doesn't remove risk entirely, but it doesn't tie the whole deposit to a single point of failure. If one issuer has a problem tomorrow like the SVB story in 2023, the deposit sags only partially, not entirely.

FAQ

• What is a stablecoin in simple terms?

  A stablecoin is a cryptocurrency pegged to a stable asset, usually the US dollar. One token should be worth one dollar, and that's backed either by a company's real reserves, by crypto collateral, or by an algorithm. Put more simply, it's a digital dollar that's convenient for settling inside an exchange without moving money to a bank.

• Which stablecoin is better to choose for trading?

  For scalping and active trading, most traders use USDT because of its maximum liquidity on almost all exchanges. For settlements with institutional partners or for long-term storage, USDC is more often the choice because of its more transparent reserves. DAI and USDS remain a niche choice for those working inside DeFi protocols.

• Can you lose money on a stablecoin?

  Yes. A depeg, meaning a loss of the dollar peg, has happened even to large stablecoins. USDC fell to $0.87 in March 2023, USDT lost its peg several times since 2017. The algorithmic UST went fully to zero in May 2022 and never recovered, so before holding a large sum in a stablecoin it's worth figuring out what its backing is.

• How is DAI different from USDT and USDC?

  DAI is backed not by dollars in a bank account but by crypto collateral in smart contracts, with no single issuing company. USDT and USDC have an issuer that can technically freeze a specific wallet; DAI historically has no such function. In exchange, a DAI holder takes on smart-contract risk and the risk of governance decisions made by vote.

• What happened to DAI in 2026?

  MakerDAO renamed itself Sky Protocol back in 2024 and issued the USDS token as DAI's successor. In April 2026 major exchanges, including Binance, started automatically converting users' DAI balances into USDS at a one-to-one rate and winding down trading pairs with DAI. Both tokens technically still exist and are backed by a shared collateral pool, but it's USDS that's gradually becoming the main asset.

• Why are there more pairs with USDT than with USDC on exchanges?

  Historically USDT launched earlier and became the de facto standard for Asian and offshore venues. USDC is more deeply represented in DeFi and on regulated exchanges like Coinbase, but by total pair volume and liquidity USDT still leads by a wide margin. For a scalper that means a tighter spread and less slippage specifically in pairs with USDT.

• The list of stablecoins is long, what should you look at when choosing?

  Look at three things: the type of backing (fiat, crypto collateral or algorithm), the frequency and transparency of reserve audits, and the depth of liquidity on the specific exchange where you plan to trade. Only three or four players carry any real weight, USDT, USDC and the DAI/USDS pair. Everything else on a market of two hundred-plus coins has almost no practical meaning for an active trader.

Stablecoins aren't an investment asset or a way to earn on a rising price. They're a trader's working tool, a way to store capital in digital form, move it quickly between exchanges and lock in profit without a trip to the bank. The choice of a specific coin, whether USDT, USDC or DAI/USDS, should depend on your goal. Speed and liquidity versus reserve transparency, or versus censorship resistance, a different compromise every time.