Fiat-backed stablecoins such as USDT and USDC hold reserves and redeem at par. Their risk is not market risk but counterparty and regulatory risk: whether the reserves exist, who audits them, and which jurisdiction can freeze them. Algorithmic stablecoins attempted the same result with code and have failed catastrophically before.
Because your profit and loss is denominated in them, a stablecoin is not a neutral container. It is a position you hold at all times.
The mistake it causes: assuming all stablecoins are interchangeable. They differ in reserves, disclosure, chains supported and which exchanges will redeem them.
Three designs, three very different risks
| Type | Example | Main risk |
|---|
| Fiat-backed | USDT, USDC | Reserves, custodian, regulator |
| Crypto-collateralised | DAI | Collateral crash, liquidation cascade |
| Algorithmic | Historic failures | Reflexive collapse, total loss |
Algorithmic designs have failed catastrophically before, wiping out tens of billions in days. Treat any stablecoin that maintains its peg through incentives rather than assets as a trade, not a store of value.
A stablecoin is a position you hold permanently
Because crypto pairs are priced in them, your entire profit and loss is denominated in a stablecoin whether you think about it or not. Sitting in USDT between trades is not sitting in cash; it is holding an instrument with its own counterparty and regulatory risk, continuously.
What to actually check
- What backs it. Cash and short-dated government paper is different from commercial paper or loans.
- Who attests, and how often. An attestation is not a full audit, and monthly is not continuous.
- Which jurisdiction can freeze it. Major fiat-backed issuers can and do blacklist addresses at the request of authorities.
- Which chain you hold it on. The same ticker on the wrong network is an unrecoverable transfer.
Depegs are survivable, usually
Fiat-backed stablecoins have lost their peg temporarily during banking stress and recovered. That is not reassurance, it is a reminder that "stable" describes an intention rather than a guarantee, and that a depeg will happen at the exact moment you most want to move money.
What to do with this
- Do not treat stablecoins as cash in your risk calculations.
- Check the network before every transfer. This is the most common irreversible mistake in crypto.
- Prefer issuers with regulated status and frequent disclosure if you hold meaningful size.
