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Markets & Instruments

What Is a Stablecoin

A stablecoin is a coin whose issuer promises one dollar for each one and keeps a reserve of dollars and bills to make it good, so that money can move on a coin network without moving in price. This paper shows what the peg is, how the reserve makes and destroys coins, why bitcoin on a coin exchange is priced in a stablecoin and what a slip in the peg does to that price, and where the coin appears in a wallet and in pair names. After reading it you can read a USDT or USDC line, convert a coin-priced quote to dollars, and say why a broker's BTCUSD and an exchange's BTC/USDT differ.

Difficulty
Intermediate
Reading time
5 min
Pages
8
Reviewed by
Saman Rahbar

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A stablecoin, in five lines

A stablecoin is a coin whose issuer promises to give one dollar for each one, always. It keeps the promise by holding a reserve of dollars and short government bills against every coin in circulation. It exists to move money between exchanges and wallets without a bank, and to be the unit other coins are priced in: on many exchanges bitcoin is quoted against a stablecoin, BTCUSDT, rather than against dollars. Its price sits close to 1.0000, moving a few thousandths either way most days. A broker rarely offers it as a CFD; it appears instead inside the symbol names. The largest are USDT and USDC.

A coin on an anchor

Picture a coin on an anchor. It floats on the same water as the other coins, the market, but it is tied to something underneath: the reserve of dollars and bills the issuer holds, one dollar for every coin. Other coins rise and fall with the water. This one is held at one dollar. The peg is the promise, the anchor is the reserve, and the price stays put for exactly as long as the anchor holds.

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