Stablecoin risks
Depegs, reserve and issuer risk, freezes and network risk: why a stablecoin is not the same as a bank deposit.
Stablecoins aim to hold a fixed value, but they are not risk-free.
Depeg
A stablecoin depegs when its market price moves noticeably away from 1.00. This can happen when people doubt its reserves, during market panic, or when a mechanism fails. Algorithmic stablecoins have collapsed completely in the past.
Issuer and reserves
Fiat-backed stablecoins depend on a company holding enough high-quality reserves and honouring redemptions. Their value depends on the issuer's honesty, management and regulation.
Freezing
Issuers of centralised stablecoins can freeze tokens at specific addresses, for example at the request of authorities. This is a deliberate feature of these tokens.
Network risk
A stablecoin is only as reliable as the network it runs on: congestion, high fees or technical issues affect transfers.
Not a bank deposit
Stablecoins are generally not covered by deposit insurance schemes. Holding them through a service adds the risks of that service.
Reducing the risks
- Prefer widely used stablecoins with published reserve reports.
- Check the network before every transfer and keep a little of its native coin for fees.
- Do not keep everything in one stablecoin or with one service.
- Be careful with offers of unusually high interest on stablecoins: high yield usually means high risk.
- Watch the market price: a stablecoin trading noticeably below 1.00 is a warning sign.
University materials are for education only and are not investment, legal or tax advice.