Stablecoins Explained: USDT, USDC and How They Hold Their Price
Most crypto swings wildly in price. Stablecoins are designed not to. They aim to stay worth exactly one unit of a real currency, usually $1. They're among the most-used coins in crypto, and Tether (USDT) is one of the largest coins by market cap.
What stablecoins are used for
- Parking money between trades without converting back to rupees or dollars.
- Trading pairs: many exchanges price coins in USDT, for example BTC/USDT.
- Sending dollars abroad quickly, at any hour.
- DeFi: lending and borrowing on blockchain apps.
How they hold their price
Fiat-backed (USDT, USDC): the issuer holds reserves, such as cash and short-term US government bonds, roughly equal to the coins in circulation. In principle each coin can be redeemed for $1. That promise keeps the market price close to $1. If USDT drops to $0.99, traders buy it and redeem it for $1, pushing the price back up.
Crypto-backed (for example DAI/USDS): the coins are backed by other crypto locked in smart contracts, usually worth more than the stablecoins issued, to absorb price drops.
Algorithmic: these try to hold $1 using code and incentives rather than full reserves. This design has failed badly before. TerraUSD (UST) collapsed in May 2022, wiping out tens of billions of dollars.
The risks
- De-pegging: a stablecoin can briefly or permanently fall below $1. Even reserve-backed USDC dipped to around $0.88 in March 2023 when some of its cash was stuck at the failed Silicon Valley Bank, before recovering.
- Issuer and reserve risk: you're trusting the company to really hold the reserves and honour redemptions. Check how transparent each issuer is about its reserves.
- Regulation: rules for stablecoins are changing in many countries, which can affect which ones are available.
- Currency risk for Indians: a dollar stablecoin holds its value in dollars. In rupees, its value moves with the USD/INR exchange rate.
Tax note for India
Stablecoins are virtual digital assets too. Selling or swapping them is taxed like any other crypto, at 30% plus cess on any profit, with 1% TDS. Small rupee gains from currency moves are still taxable. See the crypto tax guide.
Check stablecoin prices
A healthy stablecoin's 7-day chart should look almost flat. See Tether (USDT) and USDC, or compare them with Tether vs USDC.
For information only, not investment advice.