What Is a Stablecoin? A Guide for Investors New to Crypto
When first hearing about crypto assets, many people immediately think of Bitcoin, whose price can rise or fall sharply in a short time. Because of this, many investors ask: ‘If crypto is known for being volatile, why are there assets like USDT whose value is almost always the same?’
The answer: not all crypto assets are designed for the same purpose. If Bitcoin and Ethereum are known as assets whose value moves according to market supply and demand, there is another type of crypto asset specifically designed to maintain value stability. This asset is called a stablecoin.
For investors already familiar with mutual funds, stablecoins can be an easier entry point to understanding the digital asset world because their characteristics differ from the crypto assets that often become media highlights.
What Is a Stablecoin?
Simply put, a stablecoin is a crypto asset whose value is pegged to another, more stable asset.
The most popular type is a stablecoin pegged to the US dollar. One example is USDT (Tether), which is designed so that 1 USDT is worth approximately 1 US dollar.
This means the main purpose of USDT is not to provide large price increases like Bitcoin. Instead, stablecoins focus more on maintaining value stability.
To simplify understanding, imagine the following difference:
Bitcoin is more like an asset whose value can rise and fall significantly.
Stablecoin is more like an instrument that prioritises value stability over potential profit from price increases.
This is why stablecoins are often used as a ‘parking spot for funds’ within the crypto ecosystem or as a way to gain exposure to the US dollar in digital form.
Why Do Stablecoins Exist? What Problem Do They Aim to Solve?
The emergence of stablecoins was driven by several needs that volatile crypto assets could not fully meet.
- High Crypto Volatility
Bitcoin and other crypto assets can experience very large price movements in a short time.
Under certain conditions, Bitcoin’s price can rise or fall by several per cent in just one day. For some investors, this is attractive because it opens up profit opportunities. However, for others, high volatility is a challenge.
If someone’s goal is to store value or hold a relatively stable asset, such large fluctuations can feel uncomfortable.
This is where stablecoins play a role. With a value designed to follow the US dollar, their price movements tend to be much more stable compared to the majority of other crypto assets.
- The Need for US Dollar Exposure
Many Indonesian investors understand the importance of currency diversification.
However, access to the US dollar through conventional channels often requires additional processes, such as opening a foreign currency account or incurring international transfer fees.
Stablecoins offer an alternative in the form of a digital asset that can be accessed online and transacted at any time.
Because their value follows the US dollar, stablecoins are often used by investors who want exposure to USD exchange rate movements without having to hold physical dollar cash.
How Does USDT Work?
USDT is issued by a company called Tether Limited. Generally, Tether states that every USDT in circulation is backed by reserve assets whose value is equivalent to the amount of USDT issued. In other words, when there is 1 USDT in circulation, there are reserve assets supporting its value.
This concept helps maintain confidence that USDT can be kept around the value of 1 US dollar.
The easiest way to understand it is to look at the system’s goal: keeping the price of USDT close to the value of the US dollar.
For Indonesian investors, there is one important thing to understand:
USDT does not move following Bitcoin’s price.
The value of USDT in rupiah is more influenced by the USD/IDR exchange rate.
As an illustration:
If the US dollar strengthens against the rupiah, the price of USDT in rupiah tends to rise.
If the rupiah strengthens against the US dollar, the price of USDT in rupiah tends to fall.
Because of this, many investors see stablecoins as a way to gain exposure to the US dollar in digital form.
Stablecoins pegged to the US dollar are not limited to just one. Besides USDT, there are others, such as USDC issued by Circle.
Additionally, there are several types of stablecoins, each using different mechanisms to maintain price stability. The main types of stablecoins include: those collateralised by fiat, those backed by commodities, those collateralised by crypto, and algorithmic ones.
Stablecoin vs Other Crypto: What Is the Difference?
The table above shows that stablecoins and assets like Bitcoin actually have different functions. The two do not always replace each other but can be used for different investment purposes.
Are Stablecoins Risk-Free?
Although more stable than many other crypto assets, stablecoins still carry risks that investors need to understand.
- De-Peg Risk
Stablecoins are designed to maintain a certain value, for example, USDT around US$1.
However, under extreme market conditions, a stablecoin’s price can temporarily deviate from its reference value. This phenomenon is known as de-peg.
Cases like this have occurred in the crypto market, although for major stablecoins, such deviations are generally temporary.
- Counterparty Risk
The value of a stablecoin also depends on