What Is a Stablecoin?

Given cryptocurrency's speculative nature and reputation for extreme volatility, the idea of "stablecoins" designed to maintain a steady value—such as $1 per coin—might sound like a contradiction. Yet they are now among the fastest-growing areas of the crypto market, surpassing $300 billion in October 2025—an increase of about 47% year over year, thanks in part to recent legislative discussion supporting regulatory frameworks, which has encouraged greater institutional adoption.¹

To achieve stability, stablecoins typically are pegged 1:1 to the U.S. dollar or other fiat currency, and hold high-quality reserves such as gold, U.S. Treasuries, or other cash equivalents that can be redeemed for real money on demand.

Beware, however, that currently there are no laws that enforce stablecoin redemption policies. In addition, some stablecoins are backed by other cryptocurrencies or use algorithms to manipulate their own supply and demand depending on market conditions, which belies their promise of stability.

In July 2025, Congress passed the GENIUS (Guiding and Establishing National Innovation for U.S. Stablecoins) Act, which excludes stablecoins from commodities or securities designation, outlines reserve disclosure rules, and prohibits issuers from offering services that compete with traditional banks, such as paying interest or yield to customers. (Some crypto exchanges have skirted this rule by paying stablecoin holders "rewards" rather than interest, which is not expressly prohibited by law.)

"Initially, stablecoins mainly served to convert fiat currency to cryptocurrency, which made it easier to move in and out of more-volatile cryptocurrencies without converting back to cash each time," says Jim Ferraioli, CMT^®, director of digital currencies research and strategy at the Schwab Center for Financial Research.

Today, they may also be attractive due to:

• Ease of exchange and liquidity: Transactions are nearly instant and can be conducted 24/7, sidestepping payment settlement delays and regular bank hours.
• Lower fees: Blockchain transaction fees generally are less than those of traditional payment networks—especially for cross-border transactions.
• Store of value: Those who operate in markets with volatile currencies can take advantage of stablecoins backed by more-dependable fiat currencies.

Investing in cryptocurrencies involves risk, including total loss of principal. They are not backed or guaranteed by any central bank or government, and, because they are not considered deposits or registered securities, losses are not protected by the Securities Investor Protection Corporation.

Furthermore, the technology that underpins all types of digital assets is new and developing, and the risks associated with digital assets may not fully emerge until the technology is more widely used. In the meantime, be especially attuned to:

• Volatile reserve assets: "Investors should examine what's backing the stablecoin in question," Jim says. "Those supported by U.S. Treasuries are popular because they're far less likely to lose value."

  If the values of the underlying assets and the stablecoin deviate significantly, the stablecoin could de-peg, potentially causing losses to coin holders. In recent years, de-pegging, algorithmic failures, and unstable reserve assets have resulted in runs that have collapsed several stablecoins, leading to significant investor losses. Currently, there are no regulatory mechanisms in place to protect investor assets from these events.

• Irreversible transactions: Once you push "send" on a stablecoin transaction, those funds cannot be recovered—nor are they backed by the Federal Deposit Insurance Corporation, which protects traditional bank deposits up to $250,000 per depositor.
• Lost or hacked wallet: Digital crypto wallets allow you to access stablecoins, and they interact with a blockchain platform, which records crypto transactions. "If your crypto wallet or blockchain platform are hacked or you otherwise lose access to your wallet, you are similarly out of luck," Jim says.

In addition, keep in mind that inflation affects stablecoins in the same manner as the assets that back them.

"Stablecoins aren't for everyone, especially in the near term as the market and regulations evolve," Jim says. "However, it's important to understand their differences if you do decide to explore this emerging segment of the cryptocurrency market."