• Log in
  • Get Started

Table of Contents

What is a stablecoin? 

What are the different types of stablecoins?

How do stablecoins work?

What is the point of a stablecoin?

What are some examples of stablecoins?

The bottom line

LearnCryptocurrency 101What Are Stablecoins and How Do They Work?

What Are Stablecoins and How Do They Work?

Jun 21, 2022


7 min read

A stablecoin is a cryptocurrency just like Bitcoin or Ether. Stablecoins attempt to solve a challenging problem in the cryptocurrency market: volatility.

The notion of something called a stablecoin may strike some as an oxymoron. Cryptocurrencies, after all, are synonymous with volatility in a market routinely whipsawed by hype and speculation. Yet stablecoins, as their name makes plain, are designed to be a haven from the forces that make investing in cryptocurrencies a white-knuckle ride.

Pegged to assets such as the U.S. dollar, stablecoins aren’t prone to the wild swings that rock Bitcoin and its ilk. These staid coins enable crypto traders to lessen the risk of their portfolios. Stablecoins have also become a useful tool investors can use to trade in the cryptocurrency market. They also form the basis for crypto lending, a growing market itself, and even more exotic algorithmic instruments. As a result, stablecoins have become an indelible part of the crypto ecosystem.

What is a stablecoin? 

A stablecoin is a cryptocurrency just like Bitcoin or Ether. It’s based on a blockchain, which is a decentralized online network. Blockchain development teams or companies can create and release stablecoins the same way they do other tokens, usually by solving complex math puzzles in a process known as proof of work (PoW). There are about a dozen major stablecoins on the market.

Unlike Bitcoin and Ether, stablecoins are pegged to a reserve asset such as the U.S. dollar or gold, or in some cases, other cryptocurrencies. Those reserve assets drive the value of the stablecoin, so if the dollar goes up, so, too, does a dollar-pegged token. Holders of stablecoins should be able to redeem their tokens for the underlying asset when they choose.    

What are the different types of stablecoins?

Stablecoins come in a few variations, but most are pegged to the U.S. dollar. 

  • Fiat-collateralized stablecoins.

    These tokens are backed by traditional or fiat currencies managed by central banks, as well as government bonds such as U.S. Treasuries. There are no standards governing how stablecoin issuers manage their reserves. As a result, some issuers are more transparent about their practices than others. Some are pegged on a 1-to-1 basis with the U.S. dollar and the reserves are held in custody by a bank. Other issuers are more opaque and don’t disclose details about their reserves. 

  • Metal-collateralized stablecoins.

    These assets are backed mainly by gold and silver, although some others are pegged to precious metals such as platinum and palladium. They appeal to investors who want stablecoins truly disconnected from central bank policies. Issuers hold reserves of bullion and in some cases investors can redeem their coins for gold, silver, or another metal. Otherwise, they function much the same as fiat-pegged stablecoins.

  • Crypto-collateralized stablecoins.

    This breed of stablecoins is pegged to Bitcoin, Ethereum, and other digital assets. They are typically used by sophisticated crypto investors to play in decentralized finance. Unlike fiat or metal-backed stablecoins, these tokens require a ratio of greater than 1-to-1 to offset volatility. So $5,000 worth of Ether may be needed to back $2,500 worth of stablecoins. Investors provide the reserves themselves by locking their collateral—cryptocurrencies—into a smart contract for a set period of time. (A smart contract is a software program that manages an agreement between parties.)

  • Non-collateralized or algorithmic stablecoins.

    These instruments rely on algorithms and smart contracts to regulate the number of tokens in circulation instead of a reserve asset. A software program automatically increases supply when the price of the stablecoin rises, and decreases supply when the price falls. 

How do stablecoins work?

Because they are cryptocurrencies, stablecoins are based on widely used networks such as the Ethereum blockchain. Stablecoins aren’t subject to the direct control of a central bank such as the U.S. Federal Reserve. Yet a stablecoin pegged to the U.S. dollar is indirectly affected by the Fed’s actions. If the Fed raises interest rates, for example, that could strengthen the value of the dollar and any stablecoins that are pegged to the currency. In periods of rising consumer prices, or inflation, the value of the dollar may fall. That, too, would affect the value of stablecoins supported by the greenback.

The management of reserve assets is a key factor in determining the value and credibility of a stablecoin. If doubts arise about the adequacy of the reserve backing the stablecoins in circulation, that could undermine their value. Regulatory officials at the U.S. Treasury and the European Central Bank have expressed concern about this potential flaw in the system and fear stablecoins could melt down and harm investors if they fail.

What is the point of a stablecoin?

Stablecoins provide a less speculative way for investors to operate in the cryptocurrency market. Think of them like the tickets you buy at carnivals. With them, you can go on the rides, try your luck at the ring toss, and buy cotton candy and popcorn. If you want to return the next day for more fun, you don’t have to cash in your tickets. You can just use them again, and they’ll be worth the same amount.  

Stablecoins do the same thing in the crypto carnival. By exchanging money for a stablecoin like USDC pegged to the U.S. dollar, a holder can swap them for other cryptocurrencies, maybe at a time when Bitcoin or Ethereum have fallen in value. In other words, using stablecoins may increase a holder’s purchasing power. About three-quarters of all trading on cryptocurrency platforms in 2021 involves the use of a stablecoin, according to the European Central Bank. 

Thanks to their minimal volatility, stablecoins hold their value during bear markets. This lets investors park their assets while they wait out the downturn without having to convert back into dollars or euros or other traditional currencies. On the flipside, of course, investors won’t reap gaudy returns during bull runs. But it’s easy for traders to quickly convert a stablecoin into the token of their choice when the market turns. 

Investors also use stablecoins as collateral for cryptocurrency loans. This is a burgeoning business in the decentralized finance, or DeFi, sector. Depositors place stablecoins with lending platforms to take out loans in other cryptocurrencies, and the lender doesn’t have to fret about the collateral melting down because it’s pegged to a hard currency.

Likewise, many investors make their stablecoins available to cryptocurrency exchanges to facilitate trades in what are called liquidity pools. Investors who engage in this practice are called liquidity providers, or LPs, and they reap fees for providing their stablecoins to platforms like Uniswap.

What are some examples of stablecoins?

There is a wide variety of stablecoins with differing levels of transparency.

  • Tether.

    As the most valuable cryptocurrency after Bitcoin and Ethereum as of March 2022, the U.S. dollar-backed Tether is a widely used stablecoin. It has also been the subject of controversy for the opaqueness of its reserves. Numerous news articles have questioned whether Tether has the dollars to back its stablecoin.

  • USDC.

    This dollar-pegged token is rapidly gaining on Tether. USDC is backed on a 1-to-1 basis by reserves and managed by a consortium, including Circle and Coinbase, that sets and publishes policy and technical standards. Circle has said the reserves are audited by an accounting firm.

  • MakerDAO.

    As one of the oldest platforms in decentralized finance, MakerDAO’s DAI has become one of the most widely used crypto-backed stablecoins in the market. It issues DAI in exchange for other tokens and maintains them in a smart contract. 

  • Tether Gold.

    This issuer backs each one of its stablecoins with one troy ounce of gold and holders can redeem the shares for physical metal.

  • Ampleforth

    . This algorithmic stablecoin is designed to help investors execute cryptocurrency trades by providing liquidity, or a flow of tokens, to exchanges. Ampleworth adjusts its token supply to maintain a steady price. 

What are the potential risks associated with stablecoins?

Because cryptocurrencies are largely unregulated, stablecoin providers don’t have to comply with industry standards.  

  • Lack of transparency.

    Some issuers do not disclose proof or data about their reserves making it impossible to know if they adequately support their stablecoins. There are no audit or reporting requirements in the industry. This raises fears the tokens may collapse. 

  • Lack of precision.

    Stablecoins often deviate in value from their underlying pegs which can undermine confidence in their usefulness. 

The bottom line

Stablecoins attempt to solve a challenging problem in the cryptocurrency market: volatility. As long as prices swing wildly it will be virtually impossible to build a viable new financial industry based on digital currencies. By pegging a digital token to the U.S. dollar or gold, issuers create a way to establish a degree of certainty in an otherwise uncertain business. Now exchanges, lenders, traders, and investors are using stablecoins to facilitate their activities. 

Yet many stablecoin issuers remain inscrutable when it comes to disclosing and auditing their reserves to prove they can support their tokens in circulation. If some or even one of these platforms were to crash, it could damage confidence in the entire sector.

At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.

Get started today.


Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.

Three Things, a newsletter from Titan

Stay informed on the most impactful business and financial news with analysis from our team.

You might also like

Understanding the Different Types of Cryptocurrency

How many cryptocurrencies are there? Answers vary but in short: a lot. As many as 70,000, by one estimate.

Read More

What Is Digital Currency? Types, Advantages, and Examples

Digital money isn’t necessarily new. Today, thanks to the rise of digital payments and cryptos, individuals may be more likely to buy and spend virtual currencies.

Read More

What Is a Crypto Token and How is it Different From a Coin?

Developers can launch a crypto token to build on top of an existing blockchain’s features and popularity. Learn how they also can focus on creating, promoting, and updating it.

Read More

Can You Short Crypto?

There are many ways for investors to bet against Bitcoin and Ether and sell them short. Learn how these often involve derivatives such as futures contracts.

Read More


Smart Cash

Managed Stocks

Automated Stocks

Automated Bonds



Venture Capital

Real Estate

All Strategies


© Copyright 2023 Titan Global Capital Management USA LLC. All Rights Reserved.

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.

Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.

The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.

Cryptocurrency advisory services are provided by Titan. Cryptocurrency trading is provided by Bakkt Crypto Solutions LLC ("Bakkt Crypto"). Bakkt Crypto is not a registered broker-dealer or a member of SIPC or FINRA. Cryptocurrencies are not securities and are not FDIC or SIPC insured. Bakkt Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency execution services are provided by Bakkt Crypto (NMLS ID 1828849) through a software licensing agreement between Bakkt Crypto and Titan. Please ensure that you fully understand the risks involved before trading: bakkt.com/disclosures.

Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.

Contact Titan at support@titan.com. 508 LaGuardia Place NY, NY 10012.